The natural rate of unemployment is shaped by the levels of structural and frictional unemployment present within an economy.

Also referred to as the non-accelerating inflation rate of unemployment (NAIRU), the natural rate of unemployment is an economic concept that denotes the hypothetical unemployment rate where aggregate production is maintained at a long-term equilibrium. It is defined as the sum of structural and frictional unemployment, both of which operate independently of the economic cycle.

Structural unemployment occurs when there is a mismatch between the skills that workers possess and those demanded by employers. This imbalance can arise due to several factors, including technological advancements, shifts in consumer preferences, or geographical immobility of labor. For example, when a new technology is adopted within an industry, workers who lack the necessary skills may find themselves structurally unemployed. The extent of structural unemployment is influenced by various elements, such as the flexibility of the labor market, the quality of education and training available, and the mobility of the workforce.

Frictional unemployment, in contrast, refers to the transitional period when individuals are between jobs, actively searching for new employment opportunities. This type of unemployment is a normal aspect of a healthy economy and can result from workers voluntarily leaving their positions in pursuit of better opportunities, or from companies laying off staff due to economic fluctuations or seasonal demands. Several factors affect the level of frictional unemployment, including how easily workers can locate new jobs, the generosity of unemployment benefits, and the effectiveness of the job matching process.

It is important to note that the natural rate of unemployment is not static; it evolves over time as the determinants of structural and frictional unemployment change. For instance, if an economy enhances its flexibility through improved education and training programs, the natural rate of unemployment may decline. Conversely, if unemployment benefits become more generous, leading workers to extend their job search for an ideal position, the natural rate of unemployment may rise.

In summary, the natural rate of unemployment is influenced by the levels of structural and frictional unemployment within an economy, which are shaped by a variety of factors, including labor market flexibility, the quality of education and training systems, and the generosity of unemployment benefits.