Total unemployment = Cyclical unemployment + Non-cyclical unemployment (structural, frictional, hard core, seasonal) Natural Rate of unemployment = Total unemployment – cyclical employment Therefore, the natural rate is comprised of the non-cyclical components of unemployment - structural, frictional, hard core and seasonal unemployment. Since there is little a government can do about cyclical unemployment (other than reducing the effects of it through macro policy), the natural rate is referred to the level of unemployment at which the economy is at full employment. Full employment is one of the government’s main economic objectives and the term “full employment” implies that there is a level of unemployment that must be accepted i.e. it is impossible to have unemployment at 0% because there are some people that cannot participate in the labour market and even if jobs were created for these people they would not be able to fill them. Those unemployed individuals that are included in the natural rate are not part of the effective supply of labour as they do not exert pressure on wages in the labour market. The natural rate of unemployment in effect represents the supply constraint of the economy i.e. the limit of the labour resources that the economy can use. If the natural rate of unemployment in the economy was 5% and unemployment was running at 6%, then expansionary macroeconomic policy (low interest rates and higher government expenditure) would only reduce the unemployment level to 5%. Any further macroeconomic stimulus to increase aggregate demand and push the unemployment rate under 5% would simply cause prices to rise i.e. increase inflation. This is why the natural rate is also called the NAIRU (Non-Accelerating Inflation Rate of Unemployment), since, at the natural rate, inflation is 0%. As seen in the example above, macroeconomic policies can only cause unemployment to reach the NAIRU, it cannot actually lower the NAIRU since the natural rate includes those people that are not part of the labour market. Hence, the only way the NAIRU can be lowered is in the longer term with microeconomic policy – through education and training policies that improve the skills of unemployed individuals.
Total unemployment = Cyclical unemployment + Non-cyclical unemployment (structural, frictional, hard core, seasonal) Natural Rate of unemployment = Total unemployment – cyclical employment Therefore, the natural rate is comprised of the non-cyclical components of unemployment - structural, frictional, hard core and seasonal unemployment. Since there is little a government can do about cyclical unemployment (other than reducing the effects of it through macro policy), the natural rate is referred to the level of unemployment at which the economy is at full employment. Full employment is one of the government’s main economic objectives and the term “full employment” implies that there is a level of unemployment that must be accepted i.e. it is impossible to have unemployment at 0% because there are some people that cannot participate in the labour market and even if jobs were created for these people they would not be able to fill them. Those unemployed individuals that are included in the natural rate are not part of the effective supply of labour as they do not exert pressure on wages in the labour market. The natural rate of unemployment in effect represents the supply constraint of the economy i.e. the limit of the labour resources that the economy can use. If the natural rate of unemployment in the economy was 5% and unemployment was running at 6%, then expansionary macroeconomic policy (low interest rates and higher government expenditure) would only reduce the unemployment level to 5%. Any further macroeconomic stimulus to increase aggregate demand and push the unemployment rate under 5% would simply cause prices to rise i.e. increase inflation. This is why the natural rate is also called the NAIRU (Non-Accelerating Inflation Rate of Unemployment), since, at the natural rate, inflation is 0%. As seen in the example above, macroeconomic policies can only cause unemployment to reach the NAIRU, it cannot actually lower the NAIRU since the natural rate includes those people that are not part of the labour market. Hence, the only way the NAIRU can be lowered is in the longer term with microeconomic policy – through education and training policies that improve the skills of unemployed individuals.
3_-_economic_issues.docx