Question

What is the natural rate of unemployment?

Answer 1

Natural rate unemployment is the unemployment which prevails in the economy when cyclical unemployment is zero. Natural rate of unemployment is the sum of structural unemployment and frictional unemployment. So, it is the unemployment rate when labor market is in equilibrium and it is the minimum rate of unemployment in an economy. At this rate, inflation rate is the economy is stable so it is also known as the non accelerating inflation rate of unemployment (NAIRU). If unemployment rate falls below this level, then there will be inflationary pressures in the economy and when the unemployment rate rise above this level then there will be unemployment creating recessionary gap in the economy.