Monday, February 02, 2009
Natural Rate of Unemployment
This graphic from my Krugman-Wells textbook shows that the natural rate of unemployment is 5.6%. The natural rate of unemployment is equal to structural plus frictional unemployment. A deviation from 5.6% means short-run fluctuations in the business cycle. At 5.6% the change in unemployment is zero and thus, the economy is in equilibrium. The shaded bars show a recession. Note that unemployment is greater than the natural rate during recessions. The current unemployment rate is 7.2%. One should observe inflation when the natural rate is below 5.6% according to the Phillips Curve.