The natural rate of unemployment is the difference between those who would like a job at the current wage rate – and those who are willing and able to take a job. In the above diagram, it is the level (Q2-Q1).
The natural rate of unemployment will therefore include:
Frictional unemployment – those people in-between jobs
Structural unemployment – those people that don’t have the skills that fit the jobs that are available.
It is also referred to as the Non-Accelerating Inflation Rate of Unemployment (NAIRU) – the job market neither pushes up inflation nor holds it back.
US Labour Market – tight but little wage growth.
The recent (February 2018) US Federal Reserve Monetary Policy Report stated that the US labour market appears to be near or a little beyond full employment. In theory this should suggest major labour shortages which ultimately end in higher wages for workers. Although employers report having more difficulties finding qualified workers, hiring continues apace, and serious labour shortages would likely have brought about larger wage increases than have been evident to date. The unemployment rate appears to be below most estimates of the natural rate.
January US unemployment rate = 4.1%
Congressional Budget Office’s (CBO) current estimate of the natural rate = 4.6%
The Unemployment Gap
The unemployment rate gap is the unemployment rate minus the CBO’s estimate of the natural rate of unemployment. The shaded bars indicate periods of business recession.
The median of Federal Open Market Committee (FOMC) participants’ estimates of the longer-run normal rate of unemployment and the CBO’s estimate of the natural rate of unemployment have both been revised down by about 1% over the past few years, one indication of the substantial uncertainty surrounding estimates of the “full employment” rate of unemployment.
The US Fed have suggested that with many advanced economies experiencing such low inflation that more persistent factors may be restraining price growth therefore the NRU could be lower in some countries than many economists think. Prices in many industries have been subdued due to technological changes – internet shopping which allows easy comparison – which restricts businesses ability to demand higher prices.
What could be the reasons for less wage growth?
• Employees need less compensation as the inflation rate has been low
• An increase in part-time employment
• Spare capacity in the labour market
• Employees keen on job security so put less emphasis on wage bargaining
• Increasing number of people participating in the labour force.
• Shorter working week
• Ageing and declining working age population
Although in the US there have been labour shortages in some areas of the economy, this hasn’t flowed through into the aggregate labour market. However speculation of higher inflationary pressure through higher wages has alerted markets that the US Fed may increase interest rates although they will remain reluctant to tighten too aggressively.