Natural Rate of Unemployment
The natural rate of unemployment (Un) is composed of frictional (Uf) and structural (Us) unemployment. It is the minimum sustainable unemployment rate.
Frictional and structural unemployment are always are present in an economy. They naturally occur in an economy. That's why the natural rate of unemployment is the "minimum sustainable unemployment rate".
Frictional and structural unemployment naturally occur, which is why they compose the natural rate of unemployment (Un).
Cyclical unemployment, however, is due to economic environment. Sometimes, an economy is producing at its potential output and has no cyclical unemployment. Other times, an economy is in a downturn and has some cyclical unemployment.
The natural rate of unemployment (Un) aims to eliminate these economic environmental factors and provide a measure for unemployment in a given economy without economic downturns / upturns in consideration.
Since the natural rate of unemployment doesn't consider cyclical unemployment, it represents the unemployment when the economy is producing at its potential output (Yp). In other words, when GDP = Potential GDP.
How to calculate Natural Rate of Unemployment
To calculate the natural rate of unemployment (Un%), we'll use the following formula:
Un% = Uf% + Us%
The people in Crammerville who are frictionally unemployed (Uf) can be identified here:
Scenario: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.
This means that we can solve for the frictional unemployment rate (Uf%) like so...
Uf% = (Total # of Quits + Total # of Fired + Total # of Started Looking) / Labor Force
Uf% = (2 + 1 + 1) / Labor Force
...and once we pinpoint that the labor force in Crammerville is 100 people...
Scenario: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.
Uf% = (Total # of Quits + Total # of Fired + Total # of Started Looking) / Labor Force
Uf% = (2 + 1 + 1) / 100
...we can solve for a Uf% of 4%!
Uf% = (Total # of Quits + Total # of Fired + Total # of Started Looking) / Labor Force
Uf% = (2 + 1 + 1) / 100
Uf% = 4%
We can plug this into our natural rate of unemployment (Un%) equation like so:
Un% = Uf% + Us%
Un% = 4% + Us%
The people in Crammerville who are structurally unemployed (Us) can be identified here:
Scenario: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.
We can plug this into Us% like so:
Us% = Total # of Long-term Unemployed / Labor Force
Us% = 2 / Labor Force
Once we pinpoint that the labor force in Crammerville is 100 people...
Scenario: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.
Us% = Total # of Long-term Unemployed / Labor Force
Us% = 2 / 100
...we can solve for a structural unemployment rate of 2%!
Us% = Total # of Long-term Unemployed / Labor Force
Us% = 2 / 100
Us% = 2%
We can plug this into our natural rate of unemployment (Un%) equation like so:
Un% = Uf% + Us%
Un% = 4% + 2%
Un% = Uf% + Us%
Un% = 4% + 2%
This results in a natural rate of unemployment (Un%) of 6%!
Un% = Uf% + Us%
Un% = 4% + 2%
Un% = 6%
In other words, 6% unemployment will naturally occur in the Crammerville economy in its current state!