How to Calculate the Natural Rate of Unemployment
The natural rate of unemployment equals frictional plus structural unemployment, and it excludes cyclical unemployment, which is zero at full employment.
The Natural Rate formula
Calculator
Add frictional and structural unemployment to get the natural rate, then compare it with the actual rate.
Workers between jobs or searching for a first match, which happens even in a healthy economy.
Workers whose skills or location no longer fit the jobs on offer.
The reported rate for the same period. Used only for the cyclical comparison.
Frictional 3.1% plus structural 1.4% gives 4.5%, the rate that remains even at full employment.
- Cyclical unemployment
- 2.5%
- Labor market reading
- Below full employment
- Frictional share of the natural rate
- 68.9%
The actual rate sits 2.5% above the natural rate, and that gap is the cyclical piece.
An economy sitting at its natural rate is at full employment and producing at potential output.
Job search normally makes up the bulk of the natural rate, with structural mismatch the smaller piece.
How to calculate Natural Rate, step by step
- 1Find frictional unemployment. Workers between jobs or entering the labor force who are searching for a match, which happens even in a healthy economy.
- 2Find structural unemployment. Workers whose skills or location no longer fit the available jobs, including people displaced by new technology.
- 3Add the two rates. Natural rate = frictional + structural. Do not add cyclical unemployment to this total.
- 4Or back it out of the actual rate. If the problem gives the actual and cyclical rates instead, natural rate = actual rate − cyclical rate.
- 5Interpret the result. An economy sitting at its natural rate is at full employment and producing at potential output.
Worked example: Natural Rate
Frictional unemployment is 3.1% and structural unemployment is 1.4%, so the natural rate = 3.1 + 1.4 = 4.5%. If the actual unemployment rate that period is 7.0%, then cyclical unemployment = 7.0 − 4.5 = 2.5 percentage points, the piece a downturn opened up.
Natural Rate questions
Is the natural rate of unemployment zero?
No. Frictional and structural unemployment persist in any healthy economy, so the natural rate is positive and full employment still leaves some people jobless.
Does the natural rate change over time?
Yes. It moves with demographics, technology, the generosity of unemployment benefits, and how fast workers and firms find each other, so it is not a fixed number.
What does it mean when actual unemployment sits below the natural rate?
Cyclical unemployment is negative and the economy is producing above potential output, which puts upward pressure on wages and prices.
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