Reducing Natural Rate of Unemployment

April 21st, 2008 | unemployment -

Readers Question: What is the difference between reducing the rate of unemployment below the natural rate and reducing the natural rate of unemployment? Are the government fiscal policies the same?

The natural rate of unemployment is the unemployment which occurs when the labour market is in equilibrium. It is supply side unemployment, such as frictional and structural unemployment. (see: natural rate of unemployment)

If you reduce unemployment below the natural rate, you risk inflation occuring. This is because to reduce the rate of unemployment below the natural rate of unemployment requires an increase in Demand and economic growth.

Monetarist view of Natural Rate.

Monetarists use a slightly different concept called the NAIRU. Non accelerating inflation rate of unemployment. They argue that reducing unemployment below the NAIRU will only cause inflation and the fall in unemployment will be temporary. Therefore, to keep unemployment below this natural rate requires an ever increasing rate of inflation.

Monetarist Diagram of Phillips curve and NAIRU

Reducing the Natural Rate of Unemployment

Reducing the natural rate of unemployment involves the use of supply side policies and increased productivity. This reduction in unemployment will not cause inflation and will be permanent.

see: supply side policies

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