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What is the natural rate of unemployment? How does it change the secrets of how the economy works?
The natural rate of unemployment is a key economic concept first proposed by Milton Friedman and Edmund Phelps in the 1960s. This theory not only explains the nature of unemployment, but also reveals the secret of the stable operation of economic activities. Friedman and Phelps were awarded the Nobel Prize in Economics for their contributions to the field, and the concept is considered one of the main motivations for their award.
The natural unemployment rate can be understood as the proportion of unemployed people in the labor market under "full employment" conditions.
Simply put, the natural unemployment rate refers to the unemployment rate that still exists when the economy is in a steady state, which means that even in the case of full employment, there will still be some people looking for jobs. This unemployment rate does not mean that the economy cannot function, but is an inherent feature of the economic system.
The natural unemployment rate is primarily affected by the supply side of the economy, involving production possibilities and economic institutions. This means that even in an apparently healthy economic system, the presence of structural unemployment or wage rigidity may still lead to a rise in the natural unemployment rate.
The natural rate of unemployment is a combination of structural and frictional unemployment that exists in an efficient and continuously expanding economy when labor and resource markets are in equilibrium.
Changes in the natural rate of unemployment are often due to disturbances in the economy, such as cyclical shifts in investment sentiment, which cause the actual unemployment rate to deviate from the natural rate over time. This deviation also reflects the influence of demand-side factors under the Keynesian view.
The significance of this theory is that policies cannot permanently reduce the natural rate of unemployment through demand management (such as monetary policy); on the contrary, structural policies are the effective way to reduce the natural rate of unemployment. These structural policies should be aligned to the supply side of the economy to reduce any frictions in the market.
According to multiple surveys, between two-thirds and three-quarters of economists generally agree that there is a natural rate of unemployment toward which the economy will tend in the long run.
The development of this concept also stems from the research of many economists over the past few decades. Although Friedman mentioned the natural rate of unemployment as early as in his 1968 speech, his description still relied on a traditional labor market model. He viewed the natural rate of unemployment as the point at which the supply and demand for jobs reach equilibrium, and the core of the theory is that there is a unique level of unemployment and output that achieves equilibrium.
In addition, Friedman's Phillips Curve theory holds that there is a negative relationship between unemployment and inflation. When unemployment falls, wages rise, which leads to inflation. However, he stressed that this relationship does not hold in the long run because inflation eventually keeps real wages and unemployment constant. This suggests that it is unrealistic to permanently reduce unemployment.
Friedman pointed out that the only natural level of unemployment corresponds to the equilibrium point between wages and inflation, which means that there is no room for persistently low unemployment.
As research deepens, criticisms of the natural unemployment rate continue to emerge. Many economists believe that there is no reliable evidence for the existence of a natural rate of unemployment and question whether the theory accurately reflects the real economy. In their view, the unemployment rate may not be a fixed value, but may show characteristics of multiple equilibria.
Therefore, the discussion on the natural unemployment rate in the economics community continues, exploring how this concept affects the thinking and actions of policymakers. In future economic research, this issue is still worth our in-depth exploration. What kind of structural changes can effectively reduce the unemployment rate?
