Natural unemployment is unavoidable in the long-term performance of an economy and includes voluntary reasons and technological changes. The natural rate of unemployment was popularized by economist Milton Friedman and is not affected by business cycles.
Natural unemployment is the level of unemployment that is unavoidable in the long-run performance of an economy. It is the type of unemployment that is independent of business cycles and short-term economic fluctuations. The term has been in use since the 1960s, when it was used to invalidate the long-term link between inflation and unemployment rates. The natural rate of unemployment is hypothetical, assuming markets are competitive and adjust quickly to changing conditions. The causes of natural unemployment include voluntary reasons and technological changes.
The natural rate of unemployment was popularized in large part by the American economist Milton Friedman in the 1960s. Economic theory prior to the 1960s generally associated high inflation with low unemployment, a correlation known as the Phillips curve. While the Phillips curve implied that governments could manipulate the economy by trading low inflation for low unemployment, the 1960s and 1970s saw high inflation and high unemployment. This phenomenon, known as stagflation, has led most economists to berate the long-term relationship between inflation and unemployment. Earlier, Friedman suggested that a natural amount of unemployment would always be present in an economy.
Natural unemployment includes unemployment due to voluntary job transitions, technological changes, and geographic mismatch between job applicants and job opportunities. Each of these factors will always be present in some real-world economy. Economists often disagree on the extent of natural unemployment, but few argue that these factors can be eliminated completely.
In a market economy, workers occasionally leave their jobs voluntarily in search of a career change. These workers are rarely unemployed for long, but they are often enough to contribute significantly to natural unemployment. Unpredictable technological changes can leave certain industries in positions that are no longer competitive. When this happens, skilled workers in that industry may find that their skills are no longer useful in finding a job. Finally, changing technology can shift where new jobs emerge to other regions of the country or the world.
The type of unemployment that rises during economic recessions and depressions is not considered natural unemployment. This unemployment results from business cycles, which cause fluctuations in the overall level of economic activity. While business cycles do not exactly repeat, they are considered inseparable from a market economy. In times of economic recession, unemployment can rise above the natural rate, while times of prosperity can fall below the natural level.
Asset Smart.
Protect your devices with Threat Protection by NordVPN
