Natural rate of unemployment

Milton Friedman coined the term "natural rate of unemployment."

The natural rate of unemployment is determined by supply-side factors such as the economy's production possibilities and economic structure. It is not zero but a level consistent with long-run aggregate production. This concept clarifies that full employment is not synonymous with zero unemployment.

Example

If an economy is producing at its long-run level, the natural rate of unemployment reflects the proportion of the workforce that is unemployed due to factors like job matching and wage adjustments.

Understanding the natural rate of unemployment is crucial for policymakers to set realistic expectations and avoid inflationary pressures.

Related concepts

Economics

Keynesian economics emphasizes aggregate demand as a driver of employment

Milton Friedman

Milton Friedman won the Nobel Prize in Economic Sciences in 1976

Permanent income hypothesis

Permanent income hypothesis (PIH) focuses on permanent income for consumption decisions

John Maynard Keynes

Keynes coined the phrase "In the long run, we are all dead."

Phillips curve

Phillips curve shows inverse relationship between unemployment and inflation

Paradox of thrift

Paradox of thrift: individual saving decreases aggregate demand and gross output

Educational content, not financial advice.

One email a day: 5 concepts + the 5 stories that matter →

Swipe through 100 ML concepts daily

Open TickerNews