Question

Fully describe the concept of the natural rate of unemployment. How is it measured? Is the current unemployment rate as measured by the Bureau of Labor and statistics above or below the natural rate of unemployment?If the unemployment rate is above the natural rate what does that mean and if below the natural rate what does that mean?

Answer 1

Natural rate of unemployment is the lowest rate of unemployment in an economy . It is natural because it is partly frictional and partly structural.It is not caused by the problems of a bad economy. Every economy has this type of unemployment.To calculate natural unemployment we first add frictional unemployment to structural unemployment and then divide by total labor force.The unemployment rate in US has been low about 5% and at times to 3%.In May 2018, US unemployment rate was 5.5% while the natural unemployment rate was 5.3%.   An unemployment rate below the natural rate suggests that the economy is below its average frictional and structural level. An unemployment rate above the natural rate means more workers are unemployed and contribute less to output and actual output is less than potential output.