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What is the natural rate of unemployment formula?

The national unemployment rate in the US fell to 4.2 percent in November. But some wonder, what is that natural unemployment rate and how is it calculated?

The national unemployment rate in the US fell to 4.2 percent in November. But some wonder, what is that natural unemployment rate and how is it calculated?

The Bureau of Labor Statistics (BLS) reported Friday 3 December, that the national unemployment rate fell from 4.8 to 4.2 percent in November. The economy added around 210,000 jobs during the month, bringing the total number of jobs created to 18.5 million since April 2020.

The agency also reported that last month the unemployment rate for "adult men and women, Whites, Blacks, and Hispanics" fell last month.

What is a natural unemployment rate?

The natural unemployment rate represents a very different indicator to that which was released by the BLS. This rate captures the real and voluntary forces that contribute to unemployment within an economy. The natural rates reflect the structure of the labor force that inhibits a certain number of workers from participating.

What are frictional and structural unemployment?

  • Frictional unemployemnet refers to and challenges in the labor market between workers seeking jobs and firms seeking workers. An example would be when a worker seeking a change in their career. 
  • Structural unemployment rate refers to number of workers who have been unemployed for a prolonged period of time. One example of this could be automation or the sending of jobs oversees. Some workers may not have the skills needed to find a new job, but have no chance of returning to work similar to that from which they lost.

How is the natural unemployment rate in the United States calculated?

To calculate the natural unemployment rate, two other metrics are needed: the frictional and structural unemployment rates.

The formula adds together both of these rates and what results are what the natural unemployment rate is consistent with full employment. Full employment refers to a tight where there is no unemployment. Currently, the US Federal Reserve estimates the natural unemployment rate to stand at around 4.6 percent.

The central bank believes that the rate will drop steadily through 2030. A report released by the Congressional Budget Office stated that "The unemployment rate is projected to decline through the remainder of 2021 and the first half of 2022 before returning to a level slightly above the noncyclical rate of unemployment—consistent with their historical average relationship." This accounts for the devastating impact the pandemic has and continues to have on the labor market.

How many people are considered "long-term" unemployed in the US?

The BLS has reported that around 2.2 million workers have been out of a job for more than twenty-seven weeks, representing around a third of all unemployed people in the country. The number of permanent job losers declined in November to 1.9 million, up significantly 623,000 from February 2020.