Natural unemployment rate

The natural unemployment rate (also NRU , for English natural rate of unemployment , normal , structural or equilibrium unemployment rate ) is an economic hypothesis that states that in addition to the real wage given in the overall economic equilibrium, there is always a certain level of underemployment , which consists of information deficiencies , mobility barriers , adjustment costs , demographic changes, coincidences and similar market imperfections and cannot be eliminated even in the short term.

The unemployment rate will not fall to zero because of the market imperfections, but will fluctuate around a level that is determined by the market imperfections. This level is the natural unemployment rate. In the long term, it is a variable that can be influenced primarily by regulatory and structural policy measures.

The natural unemployment rate describes within economics a rate specific to each economy according to the theory of Milton Friedman , which corresponds to the macroeconomic equilibrium in which the expected rate of inflation equals the current rate . The natural unemployment rate can also be understood as the unemployment rate to which the economy will keep returning in the medium term.

Conceptual classification

classification

In macroeconomics and also in macroeconomic politics, the concept of the natural unemployment rate plays a central role. The natural unemployment rate is often related to the study of unemployment . There are two conceivable approaches to analyzing the problem of unemployment:

• Unemployment as a long-term problem (natural unemployment rate)
• Unemployment as a short-term problem. (cyclical unemployment)

An economy's natural unemployment rate reflects the normal level of long-term unemployment in an economy. The annual fluctuations are closely linked to the ups and downs in the business cycle . This is why these deviations in the unemployment rate from the natural unemployment rate are called cyclical unemployment. The deviations result primarily from structural factors such as the market power of companies and institutional factors on the labor market. They can be reduced by taking appropriate measures. The measures include, for example:

• technological advances that make it easier to find a job,
• the introduction of statutory minimum wages ,
• the association of workers in unions and
• the use of efficiency wages .

Further effects on the natural unemployment rate go hand in hand with the oil price shocks , for example . That is, the rise in the price of oil leads to a decline in real wages paid by companies in the medium term. Thus the natural unemployment rate increases and natural production decreases.

When considering the relationship between the natural unemployment rate and the Phillips curve , it is assumed that the natural unemployment rate is the unemployment rate at which actual and expected inflation correspond. According to Friedmann and Phelps, there is no long-term relationship between the unemployment rate and the inflation rate. The inflation rate is only determined by the nominal growth of the money supply . The unemployment rate tends towards the natural unemployment rate regardless of the inflation rate .

Overview of the results of the studies on the influence of institutions and macroeconomic shocks on unemployment

	Stephen Nickell Richard Layard (1999)	Elmeskov et al. (1998)	Belot, van Ours (2000/01)	Nickell et al. (2003)	Blanchard, Wolfers (2000)	Bertola et al. (2001)
Institutions
Replacement rates	+	+	+	+	+	insig.
Length of incapacity for work	+	n / A	n / A	+	+	+
Level of organization	+	insig.	-	insig.	+	insig.
Taxes	+	+	+	+	+	+
coordination	-	-	-	-	-	-
Active labor market policy	-	-	n / A	n / A	insig.	insig.
Shocks
Change in inflation rate	-	-	-	insig.	n / A	-
Real interest rate	n / A	n / A	n / A	n / A	+	+
Import / oil prices	n / A	n / A	n / A	+	n / A	n / A
Examined records
Period	1983-1994	1983-1995	1960-1995	1961-1992	1960-1995	1970-1996
periodicity	6 years	Annually	5 years	Annually	5 years	5 years
Number of countries examined	20th	19th	18th	20th	20th	20th
Note: The results refer to the estimates preferred by the author. The dependent variable is the unemployment rate - (-): if the variable increases by one unit, this leads to an increase (decrease) in the unemployment rate; insig .: insignificant; na: the corresponding variable was not included in the investigation.

Delimitation of the natural unemployment rate from NAIRU

The natural unemployment rate must be differentiated from the unemployment rate that does not accelerate inflation ( NAIRU for Non Accelerating Inflation Rate of Unemployment ). The Nairu is interpreted in the literature as that unemployment rate that is associated with a constant inflation rate in the long term.

Criticism of the term

The concept of the natural unemployment rate is controversial. The term “natural” suggests that the unemployment rate is desirable or inevitable. However, the name means that this type of unemployment will not go away on its own in the long term. The reasons for persistent unemployment are therefore not inherent, but are often structural and can be influenced by political measures. The designation of the natural unemployment rate as “structural unemployment” was proposed for the first time by Edmund S. Phelps , but has so far not been accepted.

Determination of the natural unemployment rate

Determining factors

The determinants of the natural unemployment rate can be narrowed down according to the duration and frequency of unemployment. On the one hand, the duration of unemployment depends on cyclical factors and, on the other hand, on the following structural characteristics of the labor market :

• Labor market organization, this includes, for example, the presence or absence of employment agencies
• demographic structure of the labor force
• The unemployed strive for a better job, which in turn is often related to the availability of unemployment benefits.

Example: A person voluntarily gives up an employment in order to have more time to find a new or better job (so-called search unemployment or frictional unemployment ). If the positions are all equal, the job seeker will accept the first position that is offered to him. However, if some positions are better than others, it is worth looking further and accepting a waiting time. This is where unemployment benefits come into play; the higher it is, the more likely it is that job seekers will look longer for better work, or that they will quit their current job to find a better job.

The determining factors for the frequency of unemployment include:

• the variable labor demand of different companies in an economy
• the rate at which new workers are added to the labor force.

Example:

Companies grow or shrink if total demand remains constant. The growing companies hire more workers, while the shrinking companies are losing workers. The greater this difference in labor demand between companies, the higher the unemployment rate.

However, the above factors change in importance over time. The structure of the labor market, as well as the number of economically active persons, can change. The variability of the demand for labor between different companies can also shift.

Derivation of the natural unemployment rate

In theory, it is assumed that the actual price level corresponds to the expected price level . With this assumption, wages and prices determine the natural unemployment rate . In general, however, the actual price level deviates from the price level that those involved in wage setting expect. Thus the unemployment rate does not necessarily correspond to the natural unemployment rate. ${\displaystyle P}$ ${\displaystyle P^{e}}$

Adoption:

${\displaystyle P^{e}=P\!\,}$

By inserting:

${\displaystyle W=PF(u,z)\!\,}$

Wage setting equation:

${\displaystyle {\frac {W}{P}}=F{\underset {-,+}{(u,z)}}}$

Pricing equation:

${\displaystyle {\frac {P}{W}}=1+\mu }$ or. ${\displaystyle {\frac {W}{P}}={\frac {1}{1+\mu }}}$

By equating and , the natural unemployment rate can be represented algebraically as follows: ${\displaystyle {\frac {W}{P}}=F{\underset {-,+}{(u,z)}}}$ ${\displaystyle {\frac {W}{P}}={\frac {1}{1+\mu }}}$

${\displaystyle F(u_{n},z)={\frac {1}{1+\mu }}}$

With

• ${\displaystyle P}$= actual price level
• ${\displaystyle P^{e}}$= expected price level
• ${\displaystyle W}$= Nominal wage
• ${\displaystyle u_{n}}$= natural unemployment rate
• ${\displaystyle u}$= Unemployment rate
• ${\displaystyle z}$= Structural variables on the labor market (this includes all characteristics that determine the structure of a labor market, e.g. occupational safety or working conditions)
• ${\displaystyle \mu }$= Profit premium
• ${\displaystyle {\text{W/P}}\!\,}$= Real wage

See also

Base unemployment

literature

• Olivier Blanchard, Gerhard Illing: Macroeconomics . 4th edition. Pearson Studies, Munich 2006, ISBN 978-3-8273-7209-3
• Rüdiger Dornbusch, Stanley Fischer, Richard Startz: Macroeconomics . 8th edition. Oldenbourg, Munich 2003, ISBN 3-486-25713-7
• Milton Friedman : The role of monetary policy . In: American Economic Review , 1968, Vol. 58, pp. 1-17.
• N. Gregory Mankiw: Fundamentals of Economics . 3. Edition. Schäffer-Poeschel, Stuttgart 2004, ISBN 3-7910-2163-X .
• Jeffrey D. Sachs, Felipe B. Larrain: Macroeconomics in a global perspective . Oldenbourg, Munich 2001, ISBN 3-486-25826-5
• Marc D. Sommer: Natural unemployment. From a European and national perspective , with a foreword by Karl von Wogau , Grin, Munich 2016, ISBN 978-3-668-27405-1

Individual evidence

1. ↑ Oliver Blanchard / Gerhard Illing: Macroeconomics . Pearson, 2014, p. 201
2. ^ Sachs, B. Larrain: Macroeconomics in a global view . 2001, p. 642 f.
3. ^ M. Friedman: The role of monetary policy . 1968, pp. 1-17
4. ↑ Blanchard, Illing: Macroeconomics . 2006, p. 172
5. ↑ Dornbusch, Fischer, Startz: Macroeconomics . 2003, p. 180
6. ↑ Mankiw: Fundamentals of Economics . 2004, p. 653 ff.
7. ↑ Blanchard, Illing: Macroeconomics . 2006, p. 227 ff.
8. ↑ Mankiw: Fundamentals of Economics . 2004, p. 853
9. ↑ Stephen Nickell , Richard Layard : Labor Market Institutions and Economic Performance . In: O. Ashenfelter, D. Card (ed.): Handbook of Labor Economics , Vol. 3. Elsevier, Amsterdam etc. 1999, pp. 3029-3084.
10. ↑ J. Elmeskov, JP Martin, S. Scarpetta: Key Lessons for Labor Market Reforms: Evidence from OECD Countries' Experiences . In: Swedish Economic Policy Review , 1998, 5 (2), pp. 205-252.
11. ↑ M. Belot, JC van Ours: Unemployment and Labor Market Institutions: An Empirical Analysis . In: Journal of the Japanese and International Economies , 2001, 15 (4), pp. 403-418.
12. ^ S. Nickell, L. Nunziata, W. Ochel, G. Quintini: The Beveridge Curve, Unemployment, and Wages in the OECD from the 1960s to the 1990s . In: P. Aghion, R. Frydman, J. Stiglitz, M. Woodford (Eds.): Knowledge, Information and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps . Princeton University Press, Princeton and Oxford 2003, pp. 394-431.
13. ↑ Olivier Blanchard , J. Wolfers: The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence . In: Economic Journal , 2000, p. 110, C1-C33.
14. ^ G. Bertola, FD Blau, LM Kahn: Comparative Analysis of Labor Market Outcomes: Lessons for the US from International Long-Run Evidence . NBER Working Paper No. 8526, 2001.
15. ↑ doku.iab.de (PDF; 96 kB) based on Beissinger, p. 421 ff.
16. ↑ Beissinger: Structural Unemployment in Europe: An inventory . (PDF; 96 kB; p. 4) p. 414
17. ↑ Mankiw: Fundamentals of Economics . 2004, p. 653
18. ↑ Blanchard, Illing: Macroeconomics . 2006, p. 196
19. ↑ Dornbusch, Fischer, Startz: Macroeconomics . 2003, p. 180 ff
20. ↑ Blanchard, Illing: Macroeconomics . 2006, p. 193 ff