natural rate of unemployment

The natural rate of unemployment is the equilibrium rate of unemployment. At the real wage rate W1 in the diagram above, E1 workers are employed. But the total labour force remains higher than the employed labour force. Thus the natural rate of unemployment = AB and consists of frictional + structural unemployment

The government might cut the natural rate of unemployment by reducing the horizontal distance between the supply of labour curve and the labour force curve. Any supply-side labour market policy that can increase the number of people willing and able to find employment in the labour market will shift SL to the right, this narrowing the gap.

These policies include measures designed to improve incentives to find and accept work and policies to boost the human capital of the workforce to improve the employability of the unemployed.

Unemployment in the UK economy has fallen someway below the average for countries inside the European Union. Some economists claim this is evidence that the natural rate of unemployment has fallen, allowing the economy to operate at a higher level of economic activity without experiencing an acceleration in inflation.