Natural rate of unemployment

The unemployment rate that persists when output is at its sustainable level, reflecting labor-market structure and frictions rather than temporary demand shortfalls.

Frictional unemployment: Unemployment arising while workers search for jobs or move between jobs. Job search creates a persistent interval between employment spells.
Unemployment: The condition of being without paid work while available for and seeking employment. The natural rate is a benchmark for one measured part of unemployment.
Milton Friedman: An American economist who developed monetarist arguments about money, inflation, and economic policy. Friedman named the natural rate and argued it could not be permanently lowered by demand stimulus.
Monetary policy: Central-bank actions that influence interest rates, credit conditions, and aggregate demand. Policymakers compare unemployment with estimates of its natural rate when setting policy.
Time-varying natural rate of unemployment: A view that the natural rate changes over time as labor markets and economic conditions evolve. It challenges the use of a single stable benchmark across different periods.
Structural unemployment: Unemployment caused by mismatches between workers’ skills or locations and available jobs. Persistent mismatches keep some workers unemployed despite available vacancies.
Labor force: People who are employed or actively seeking work and available to work. The unemployment rate uses the labor force as its denominator.
Edmund Phelps: An American economist whose work on expectations and labor markets reshaped macroeconomic theory. Phelps independently developed the natural-rate argument and its expectations-based foundations.
Output gap: The difference between actual economic output and estimated potential output. The gap is often inferred partly from unemployment’s distance from its natural rate.
Unemployment hysteresis: A process in which temporary unemployment shocks have lasting effects on unemployment. Hysteresis blurs the distinction between cyclical unemployment and the natural rate.

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