The term natural unemployment refers to the equilibrium rate an economy can support over the long run. The components of natural unemployment include frictional, structural and classical unemployment, all of which are considered permanent conditions.
Natural Unemployment = Classical Unemployment + Frictional Unemployment + Structural Unemployment
Also known as full unemployment, natural unemployment is the lowest level of unemployment an economy is able to support. Conceptually, it can be thought of as a baseline, or floor, below which the rate of unemployment cannot fall. There are several different explanations for unemployment; some of those factors include temporary conditions, such as cyclical unemployment.
As the name implies, the causes of natural unemployment are “permanent” conditions. This is why it is also referred to as equilibrium unemployment. While the topic is the subject of debate among economists, natural unemployment is thought to be around 4% in the United Sates, and typically includes:
- Classical Unemployment: Refers to the effect real wages and the market clearing wage have on the availability of jobs. This condition occurs when the wages a worker is willing to accept (real wages) are in excess of the wages an employer is willing to pay (market clearing wage).
- Frictional Unemployment: The time period that occurs between jobs; when a worker is moving from one job to another or searching for a job. This is always present in an economy since it results from temporary transitions as individuals move from one job to another, or as companies seek out qualified individuals.
- Structural Unemployment: An underlying shift in the availability of jobs that make it difficult for some workers to find employment. This can result from a shift in the economy or a mismatch between the job requirements of employers and the experience of workers.