Definition
The natural rate of unemployment is the level of joblessness that remains even when an economy is operating normally and producing at its potential output. It is not zero, because some unemployment is a permanent feature of a dynamic labor market.
It is built from two parts. Frictional unemployment reflects people moving between jobs and employers searching for the right fit. Structural unemployment reflects a mismatch between the skills or locations workers have and the jobs employers offer.
Why it matters
How it works
When actual unemployment equals the natural rate, the economy is at potential output and inflation tends to be stable. Cyclical unemployment, the third type, is the gap between actual unemployment and the natural rate during recessions and booms.
The natural rate itself is not fixed. Better job-matching technology can lower frictional unemployment; rapid automation or generous, poorly designed benefits can raise structural unemployment. Estimating the rate is difficult, since it cannot be observed directly.