Examining the Normal Jobless Rate in Economy
Chillin' with the Unemployment Economics 101
💼 Ever heard of the Natural Rate of Unemployment (NARU)? It's when our economy is chugging along like a well-oiled machine, everything's hummin' and bustlin', except for a teeny-tiny bit of unemployment. Kinda like how a fridge might still have a scratch or two but overall, it's running smooth.
So, what's the dif-diff between NARU and NAIRU (Non-Accelerating Inflation Rate of Unemployment)? Think of it like this, NAIRU is like the sibling of NARU that the parents (the policymakers) don't let work as many hours because they claim it'll cause inflation.
Anyways, NARU isn't just about changes in demand, it's about everything but that. So, if the economy's doin' a little backslide, that's when we see more unemployment folks hangin' around the job market. Conversely, if we're seein' a boom in the economy, unemployment might be skinnier than a supermodel.
When we hit the NARU, that's when our economy's at full capacity, real GDP is gonna equal potential GDP, and everything's killin' it.
The Actual vs. the Natural Rate of Unemployment
So, you might be wonderin' why can't we get rid of unemployment entirely. Well, there's a few differences between the actual unemployment rate and our homie NARU.
First off, the actual unemployment rate includes structural unemployment (y'know, those issues where folks can't find work cuz they lack the right skills or somethin' like that), frictional unemployment (that lag between leavin' one job and findin' another), seasonal unemployment (like snowbirds headin' south for the winter), and cyclical unemployment (which is all about economic ups and downs). NARU, on the other hand, only cares about that last one, cyclical unemployment.
But fear not! The economy keeps on churnin' out resources, and with changes in technology, demographics, and wages, the NARU has been movin' down over the years! 📉
Why NARU ain't zero
Even when the economy's pullin' out all the stops, we ain't gonna reach zero unemployment. Why? Because of them structural and frictional problems. Honestly, folks might not have the skills employers want or they just might be havin' a hard time findin' the right job. Long story short, when the economy's at its NARU, there's just sticky inflationary pressures creepin' in.
High inflation causes the purchasing power of the greenbacks to shrink like a wet sponge in the sun and can spiral out of control. So, policymakers roll up their sleeves, tighten the economic policies, and pop those inflationary pressures back down. They'll raise interest rates, weaken aggregate demand, and lower those pesky inflationary pressures. But, that also means unemployment will probably rise.
The Percentage of Unemployment at Its Natural Level
Man, it's hard to pin down the exact percentage of unemployment when it's at its natural level. Economists just throw a bunch of models at that shit and see what sticks. During the '80s, the NARU was estimated around 6%, but over the last decade, it's dropped to approximately 4.5% in 2022. That's due to changes in tech, demographics, and minimum wages!
Full Employment vs. NARU
Full employment and NARU, they're like two sides of the same coin. When we hit full employment, that's when we find ourselves at the NARU's doorstep. The economy's runnin' on all cylinders, producing as much as it possibly can with the resources available.
When the economy's at full employment, do you know what that means? Unemployment's at its natural rate, aggregate output equals potential output (real GDP equals potential GDP), and everything is truckin' along smoothly.
Types of Unemployment Affectin' the NARU
Now, don't think for a second that just cuz we reached the NARU, that means everything's hunky-dory. Nope, we've still got frictional, structural, and seasonal unemployment hangin' around. Cyclical unemployment's just a no-show now, though.
So, why isn't the NARU ever zero? Let's talk about each type of unemployment and the causes behind it.
Type of Unemployment
Economists divide unemployment into four tennis matches, each with a unique cause, duration, and impact: frictional, structural, seasonal, and cyclical.
Frictional Unemployment
Frictional unemployment happens when people are just fuckin' around, searchin' for their dream gig or when they're newbies step Cinderella-style into the job market. It happens because of the time lag involved in searchin', matchin' and securin' a job that fits their skills and preferences like a glove.
The Internet helps simplify this problem, makin' it easier for folks to find a job. Even so, there's still sometimes frictional unemployment due to that salary and benefits deal not being exactly what the job seeker expected.
Structural Unemployment
When an industry takes a major dive, like industrialization knockin' the agricultural sector for a loop, that's structural unemployment kickin' in. It's like the workers who used to plow fields but now can't find jobs in the assembly line because they lack the necessary skills. Without acquirin' new skills, they're doomed to unemployment forever.
Retraining and infrastructure improvements can reduce structural unemployment, as can havin' policies in place to provide housing allowances for folks relocatin'.
Seasonal Unemployment
When work availability swings both ways like a pendulum due to weather, holidays, or harvest cycles, that's what we call seasonal unemployment. It's especially common in industries like agriculture, tourism, and construction. For example, workers in the tourism sector find themselves with little to do in the off-season but high demand in the peak season.
Cyclical Unemployment
Cyclical unemployment appears during economic downturns or recessions when employers can't shoulder the demand for goods and services. When the economy contracts, companies have no choice but to reduce their workforce, which leads to higher unemployment. But during economic recoveries, those jobs return in a flash.
Wrap-up
Unemployment ain't gonna be buckled down to zero, but that doesn't mean the economy ain't still thrivin' like a well-oiled machine! By understandin' the different types of unemployment, we can get a better handle on the challenges facin' the labor market and craft policies designed to tackle those issues and reduce unemployment effectively.
[1] Shibata, M., & Hyslop, J. (2020, March 11). The difference between the natural and actual rate of unemployment. Investopedia. https://www.investopedia.com/terms/n/naturalrateofunemployment.asp[2] Feenstra, G. C. (n.d.). Typologies of unemployment. The Columbia Encyclopedia. https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/typologies-unemployment[3] Bureau of Labor Statistics. (2021, March 18). Alternative measures of labor underutilization. U.S. Department of Labor. https://www.bls.gov/opub/ces/employment-and-unemployment-101/alternative-measures-of-labor-utilization.htm[4] Bureau of Labor Statistics. (2021, February 6). What's new on the BLS employment situation news release? U.S. Department of Labor. https://www.bls.gov/news.release/archives/empsit_02062021.htm[5] Himmelweit, S. (n.d.). Reducing structural unemployment. The Columbia Encyclopedia. https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/reducing-structural-unemployment
The Natural Rate of Unemployment (NARU) and the finance sector share a connection due to economic policy decisions, as policymakers may adjust interest rates to control inflation when unemployment reaches NARU, which can impact the profitability of businesses.
Moreover, understanding the Natural Rate of Unemployment and the types of unemployment, such as frictional, structural, seasonal, and cyclical, is crucial for businesses, as it helps recognize the challenges facing the labor market and develop strategies for attracting and retaining employees effectively, contributing to business growth and success in the long run.
