The “natural rate of unemployment” has been defined by Milton Friedman (1968) as a level of equilibrium in the economy that is determined by structural and institutional characteristics of the economy. In other words, it is the lowest rate of unemployment that allows the market to sustain an equilibrium over a long period. Hence, if the level of unemployment in the economy is equal to its natural unemployment level, it means that the country has zero unemployment, and it is currently free of cyclical unemployment.
The two components of natural unemployment are frictional and structural. Structural unemployment relates to a longer-lasting unemployment, which is caused by structural shifts in the economy, such as a mismatch between employee skills and job market needs or a geographical mismatch between employee and employer locations. Frictional unemployment defines the level of unemployment that results from the transition of workers between jobs. Frictional unemployment can be exacerbated by such factors as a development of new technologies, as workers need to acquire new skills to make use of it.
Although according to the article all three factors described above contributed to the rise of the U.S. natural unemployment in the past years, their contribution was not equal. The authors argue that unemployment insurance benefits contributed the most to the increase of unemployment; however, their effect can be easily mitigated by introducing an expiration period for such benefits. The uncertainty about the future of the economy have also contributed to the unemployment rise; however a hiring suppression should be resolved once companies regain confidence in the future of the economy. Lastly, the article suggests that the mismatch between employees’ skills and employers’ requirements have not increased significantly during the past few years; therefore it could not have had a major effect on the natural unemployment in the country. Considering these facts, the authors conclude that there is a slack in the labour market despite the changes in the natural unemployment and these changes seem to have a transitory character, and can be reversed during the cyclical recovery.
The conclusions presented in the article may be applied to the present unemployment information in order to assess the situation in the U.S. labour market. According to the U.S. Bureau of Labor Statistics, the current level of unemployment in the country is to 6.6%, which is approximately equal to the lower boundary of the estimated natural unemployment provided in the article ("Labor Force Statistics from the Current Population Survey"). This suggests that the country has not yet reached its full employment, and there is some frictional and structural unemployment, which depend on the situation in the economy. As the values of unemployment calculated in the article are not precise and can fluctuate, it is also possible that there is some cyclical unemployment in the U.S. economy. However, as the country’s economy continues to grow, the U.S. labour market is showing signs of recovery.
References
Daly, Mary C., Bart Hobijn, Aysegül Sahin, and Robert G. Valletta. "A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?." Journal of Economic Prospectives. 26.3 (2012): 3 - 26. Print.
United States. United States Department of Labor. Labor Force Statistics from the Current Population Survey. Washington, DC: U.S. Bureau of Labor Statistics, 2014. Web. <http://data.bls.gov/cgi-bin/surveymost>.
