Natural Rate of Unemployment
The minimum unemployment rate consistent with stable inflation, reflecting frictional and structural unemployment.
What is Natural Rate of Unemployment?
The natural rate of unemployment (also called the non-accelerating inflation rate of unemployment, or NAIRU) is the lowest unemployment rate an economy can sustain without generating accelerating inflation. It consists of frictional unemployment (people between jobs) and structural unemployment (skills mismatches) but excludes cyclical unemployment. When the actual unemployment rate falls below the natural rate, labor markets become so tight that wages and prices accelerate upward. The natural rate is not fixed — it changes over time with labor market reforms, technology, demographics, and other structural factors. The US Congressional Budget Office estimates the US natural rate at around 4.5%.
Example
In 2019–2020, US unemployment fell to 3.5% — well below most estimates of the natural rate of around 4–4.5% — yet inflation remained surprisingly subdued, prompting economists to revise downward their estimates of the natural rate. This 'low unemployment without inflation' puzzle challenged traditional Phillips Curve models.
Source: Congressional Budget Office — Potential GDP and Natural Rate