Natural Unemployment

Natural unemployment or natural rate of unemployment refers to the portion of unemployment in a healthy economy. It showcases the natural presence of unemployment in a full-employment economy. This phenomenon in the economy points to the fact that full employment is not necessarily a zero-unemployment scenario.

A healthy and active economy with an increasing GDP level conveys that the country has full employment. However, there will be a percentage of unemployment. Zero unemployment is a theoretical concept, and ideally, it cannot be achieved no matter how well or boom a nation's economy is.

• The natural rate of unemployment definition portrays it as the small percent of unemployment existing in a healthy economy, eliminating the concept of zero unemployment.
• The three main components are frictional, structural, and surplus unemployment.
• The unemployment rate calculates the number of unemployed individuals as a percentage of the entire labor force.
• The Congressional Budget Office in the United States estimated that the rate in the United States is 4.4 percent in 2020.

The natural unemployment concept is relevant when the economy is flourishing and exhibits a positive economic growth scenario. It also indicates that there is no cyclical unemployment, unlike when the economy shows negative growth like a recession. However, even in healthy economies, there are people between jobs, people who lost their jobs due to government policies, technological evolution, etc. Hence this concept is more inclined toward healthy economies with abundant opportunities. 

The unemployment rate calculates the number of unemployed as a percentage of the total labor force. In the United States, for unemployment rate calculation, the labor force includes all working and jobless people aged 16 and above, except active-duty military personnel or institutionalized. Individuals are deemed employed if they get paid for work or profit from work in the preceding week. If a person is unemployed but has not sought employment in the past four weeks, is not immediately available for work, or both, that person is not counted as part of the labor force.

There are different factors contributing to unemployment in a nation. These factors are categorized into cyclical, structural, frictional, surplus, etc. If all these are absent, the unemployment rate falls to zero. Structural, frictional, and surplus components contribute to natural unemployment.

#1 - Frictional unemployment

Frictional unemployment is filled with graduates searching for their first jobs, people in between jobs, people who left jobs due to personal reasons and searching for jobs again, employees looking for ways to enhance their career through a career change, etc. It shows the gap between transferring from one job to another. Hence, sometimes, it is also known as search unemployment.

#2 - Structural unemployment

Structural unemployment occurs when there is a mismatch between skills offered by the workers and the skillset demanded by the employers. This gap induces natural structural unemployment because the workers are not suitable for the positions with their current skill set, and the employer will search for other qualified candidates.

Common examples of its causes are the technological shift in the industry, an adaption of automation in factories, or a desk job that requires knowledge of a certain upgraded version of applications. However, it is possible to nullify the negative side effects of this scenario by providing effective training to employees.

#3 - Surplus unemployment

Surplus natural unemployment is caused by government intervention. Governments can intervene with the wage structure of businesses by setting policies restricting wages falling below a benchmark value. Suppose the organizations cannot align with the government's established minimum wage due to reasons like profit concerns and financial issues. In that case, they resort to cutting down a specific number of workers, ultimately inducing natural unemployment in the country.

Nebraska is a state in the United States. According to the Nebraska Department of Labor reports in December 2021, Nebraska's Unemployment is at a Historic Low of 1.7%. At a glance, the rate is good for the state. However, it is perceived as not good for employers, unlike workers.

The reason why it is not good for workers is discernable from the explanation given by Dr. Eric Thompson, a professor of economics at the University of Nebraska-Lincoln. He compared unemployment with body fat, pointing to the relevance of an optimal level, an unemployment rate below or above is not favorable. He explains that the rate can fall below the normal rate if the employers are desperate for workers and willing to compromise. In such situations, the employers may bear the cost of workers’ demand, and smaller businesses may not be able to afford the situation and may close or shrink their business.

This has been a Guide to What is Natural Unemployment & its Definition. We explain the natural rate of unemployment, formula, example & the rate in the US. You can learn more from the following articles – 

• Unemployment Compensation
• Seasonal Unemployment
• Reaganomics