Language
Country/Area
No result found
Why are economists so fascinated by the concept of the 'natural rate of unemployment'?
In the field of economics, the "natural rate of unemployment" is a fascinating but controversial concept. Since the 1960s, this concept has attracted the attention of many economists and prompted them to further explore the complex connections between human behavior and economic activities. The work of Nobel Prize winners Milton Friedman and Edmund Phelps provides us with a profound basis for exploring this concept. The natural unemployment rate, simply put, refers to the ratio of unemployed people in the labor force when the economy is in a steady state of "full employment."
"The natural unemployment rate is not a static number, but a concept that fluctuates according to economic conditions and structural changes."
"Full employment" in economics does not mean no unemployment. In fact, it represents the long-term labor market equilibrium state without various temporary frictions. The natural unemployment rate is affected by the economic supply side and is mainly determined by economic production capacity and economic systems. If the characteristics of these institutions lead to persistent mismatches or wage rigidities in the labor market, then involuntary unemployment may emerge from the natural rate of unemployment. The natural rate of unemployment is the combination of frictional and structural unemployment that persists in an efficient and expansionary economy.
"Economists agree that the natural rate of unemployment is the level of unemployment toward which the economy naturally tends in the long run."
As research deepens, economists have discovered that the actual unemployment rate often deviates from the natural unemployment rate due to various external shocks. These fluctuations are not only driven by demand factors but also reflect the complexity and diversity of the economy. Many economists believe that demand management policies (such as monetary policy) alone cannot reduce the natural unemployment rate in the long term, but structural policies must be used to reform the supply side of the economy.
Friedman further clarified the concept of the natural rate of unemployment in his 1968 presidential address to the American Economic Association, stating that at any given time there is a level of unemployment that is consistent with equilibrium in the real wage structure. He emphasized that the certainty of this "natural unemployment rate" is based on a series of equilibrium equations, which contain the structural characteristics of the labor and commodity markets, and take into account market imperfections and random fluctuations in supply and demand.
"The concept of natural unemployment rate means that there is a unique equilibrium level of unemployment, which is a clear indicator of the long-term operation of the economy."
The formation of the Phillips Curve further triggered discussions on the natural rate of unemployment. Friedman believed that as unemployment falls, rising wages will lead to inflation, and excessive demand management can only reduce unemployment in the short term but is not effective in the long term. His argument states that when inflation expectations coincide with actual inflation, unemployment will return to levels determined by real economic factors.
However, the concept of the natural rate of unemployment is not without controversy. Critics point out that there is a lack of reliable data to determine what the "natural rate of unemployment" is and that the market may have multiple equilibria. Some economists even say that the assumption that the unemployment rate returns to the natural rate does not hold true in actual data. These debates undoubtedly challenge the framework of the natural rate of unemployment.
Nevertheless, the concept of the natural rate of unemployment remains important for understanding the ongoing functioning of the economic system and the dynamics of the labor market. Economists follow this concept and try to achieve sustained economic growth and full employment through structural reforms. Does this mean that in the face of a rapidly changing economic environment, can we find a sustainable solution?
