Question

What is the relationship between natural rate of unemployment and full employment?

Answer 1

Natural rate is the real rate that appears due to structural change or frictional change in the economy. Structural change happens if there is a technological improvement but workers are not familiar with it – example, manual labors were out of jobs when computers were introduced. Frictional change happens if workers left jobs but didn’t get another job by the time.

Full employment is the stage of an economy where Aggregate Demand (AD), Short Run Aggregate Supply (SRAS), and Long Run Aggregate Supply (LRAS) meet. This is the potential level of Gross Domestic Product (GDP) and it happens in the long-run in an economy. If this level is achieved, the actual rate of unemployment would be equal to natural rate of unemployment. Therefore, it becomes clear that the natural rate could only be achieved if the economy is in the long-run.