Natural Unemployment

AAA

DEFINITION of 'Natural Unemployment'

The lowest rate of unemployment that an economy can sustain over the long run. Keynesians believe that a government can lower the rate of unemployment (i.e. employ more people) if it were willing to accept a higher level of inflation (the idea behind the Phillips Curve). However, critics of this say that the effect is temporary and that unemployment would bounce back up but inflation would stay high. Thus, the natural, or equilibrium, rate is the lowest level of unemployment at which inflation remains stable. Also known as the "non-accelerating inflation rate of unemployment" (NAIRU).

INVESTOPEDIA EXPLAINS 'Natural Unemployment'

When the economy is said to be at full employment, it is at its natural rate of unemployment. Economists debate how the natural rate might change. For example, some economists think that increasing labor-market flexibility will reduce the natural rate. Other economists dispute the existence of a natural rate altogether!

RELATED TERMS
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  2. Structural Unemployment

    A longer-lasting form of unemployment caused by fundamental shifts ...
  3. Zero Layoff Policy

    A type of company policy that dictates that no employees would ...
  4. Working-Age Population

    The total population in a region, within a set range of ages, ...
  5. Employment-To-Population Ratio

    A macroeconomic statistic that takes the ratio of the total working ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, ...
RELATED FAQS
  1. Is there a natural rate of cyclical unemployment?

    There is no natural rate of cyclical unemployment. The natural unemployment rate is a specific feature of the economy — it ... Read Full Answer >>
  2. What is the difference between consumer surplus and economic surplus?

    The consumer surplus is the difference between the highest price a consumer is willing to pay and the actual market price ... Read Full Answer >>
  3. What does it signify about a given product if the consumer surplus figure for that ...

    High consumer surplus for a particular product signifies a high level of utility for consumers and may carry some implications ... Read Full Answer >>
  4. Which factors can influence a country's balance of trade?

    A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all of the factors ... Read Full Answer >>
  5. How does the balance of trade impact currency exchange rates?

    The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. ... Read Full Answer >>
  6. How does the balance of trade impact a nation's capital accounts balance?

    The balance of trade doesn't necessarily impact the capital account balance, but the two are very much related. A nation's ... Read Full Answer >>
Related Articles
  1. Economics

    Examining The Phillips Curve

    This model depicts an inverse relationship between unemployment and wage inflation, but is it accurate?
  2. Economics

    What You Need To Know About The Employment Report

    This widely watched indicator of economic well-being directly influences the market.
  3. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  4. Budgeting

    Are You Living Too Close To The Edge?

    If a missed paycheck will make your finances cave in, you must learn how to make proper supports.
  5. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  6. Budgeting

    Planning For Unemployment

    Preparation can help you land on your feet after getting the "old heave-ho".
  7. Economics

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  8. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  9. Investing

    The Labor Market Recovery’s Missing Ingredient

    Job creation is running at the fastest pace since the 90s, and there is some evidence that wage growth is finally starting to accelerate, albeit modestly.
  10. Economics

    Gambling on Macau: Too Risky?

    Macau was once heralded as the new Las Vegas for casino investors. Is it too late?

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center