Check out these other AP Macro resources

  •  Watch AP Macro live review streams every week with Fiveable+! 👉 Join Today

-----------------------------------------------------------------------------------------------------------------------------

Throughout history, Unemployment has varied considerably, reaching a high of 24.9% in 1933 during the Great Depression and a low of 1.2% in 1944 during World War 2. However, the natural rate of unemployment has remained at around 4-5% for a very long time. Let me explain:

Definitions 📖

  • The natural rate of unemployment refers to the combination of structural and frictional unemployment
  • The natural rate of unemployment is alternatively defined as the rate of unemployment in an economy at equilibrium
  • The current rate of unemployment takes into account the combination of structural, frictional, and cyclical unemployment
  • The NRU means that there is no CYCLICAL unemployment, not no unemployment
  • An economy will always have frictional and structural unemployment, which is why the NRU is not 0!

Analysis

  • When the rate of unemployment is above 6%, the economy contains a large contingent of workers who are cyclically unemployed, for the unemployment rate is above the natural rate of unemployment
  • When the rate of unemployment is below 4%, the economy is under inflationary pressure and is producing too many goods and services, for the unemployment rate is below the natural rate of unemployment. Even if zero workers were cyclically unemployed this economy would not be in equilibrium

Conclusion 🧠

  • The difference between the natural rate of unemployment and the current rate of unemployment is based upon the level of cyclical unemployment in the economy
  • Natural Rate of Unemployment= Current rate of unemployment- cyclical unemployment(excepting when the economy is under an inflationary gap)

Amadeo, Kimberly. “Compare Today's Unemployment with the Past.” The Balance, The Balance, 27 July 2019, www.thebalance.com/unemployment-rate-by-year-3305506.

Did this answer your question?