Natural Rate of Unemployment [NAIRU;NRU]

The Natural Rate of Unemployment, also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU), represents the lowest level of unemployment that an economy can sustain without causing inflation to accelerate. This concept, developed by economists Milton Friedman and Edmund Phelps, suggests that there is a long-term unemployment rate consistent with stable inflation. The natural rate includes frictional unemployment (people between jobs) and structural unemployment (mismatches between worker skills and job requirements), but excludes cyclical unemployment caused by economic downturns. For example, the U.S. natural rate is estimated to be around 4-5%, meaning unemployment cannot fall much below this level without triggering rising inflation. Factors affecting the natural rate include labor market flexibility, unemployment benefits generosity, job search efficiency, and demographic changes. When actual unemployment falls below the natural rate, the economy is said to be ‘running hot,’ potentially leading to wage pressures and inflation. Central banks monitor this concept closely when determining whether the labor market is at full employment.