natural rate of unemployment (1 Viewer)

[kevin101]

could somebody please explain to me the natural rate of unemployment and the nairu, in simple terms. I'm reading the textbook but i dont get it.

 

[ninetypercent]

natural rate of unemployment, i think, is the rate at which there is no cyclical unemployment - only frictional, seasonal, structural etc

correct me if I am wrong, because i dont really understand this well either

 

[moll.]

The natural rate of unemployment is the best possible unemployment rate that you can hope for in a country/society. It's the point at which as many people as possible are employed within the workforce and the economy is at full capacity in the short-term. This rate will never be zero, as there will always be frictional unemployment (people just between jobs) and certain people will be unemployable for various reasons (drugs, mental disabilities etc). It is possible to have an unemployment rate below the natural rate, but this situation implies that your economy is operating at over-capacity which causes a whole seperate gamete of problems.
Australia's natural rate is estimated at around 4.5 - 5%. Note that for a period before the GFC we were under this rate. The same period also saw high inflation.

 

[gnrlies]

well imagine you have 10 people in the room. 8 are plumbers, 2 are carpenters. Imagine in this room only plumbers are needed. You can pay people as much as you want, but when all 8 plumbers are employed, more money will not generate more plumbers. So in this economy the NAIRU is 20%. Higher wages in this case will simply produce inflation as no extra capacity has been injected into this economy.

Regards