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Natural Rate of Unemployment

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PPGPortal > Home > Concept Dictionary > N, O > Natural Rate of Unemployment
 

Natural Rate of Unemployment 

The rate of unemployment to which the economy tends to return in the long run.

(Peter Dungan, Toronto  PPG1002H) 

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Although the market for labour is complex, it does “clear” over time like other markets, with the average wage being the price that equates demand and supply. When the market does clear, the measured unemployment rate is not zero.

For various reasons there will still be some unemployed people. The percentage of the workforce that cannot find work when the labour market has cleared is the “natural rate” of unemployment. The natural rate of unemployment is also referred to as the “Non-Accelerating Inflation Rate of Unemployment” or NAIRU. It is so called because at the natural rate of unemployment there is no upward or downward pressure on real wages and inflation therefore is neither accelerating nor decelerating. There are two types of unemployment that contribute to the natural rate of unemployment, frictional unemployment and structural unemployment.

References

Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.

 

     

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