Natural rate of unemployment, Microeconomics

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Natural Rate of Unemployment: According to neoclassical economics, wage rate is determined by a process of labour-market clearing (in which employers and workers compete with each other, making sure that labour supply equals labour demand). Why, then, do we always observe unemployment? Neoclassical theorists argue that observed unemployment reflects structural, frictional or disguised effects which are consistent with labour market clearing. Or we can say that this ‘natural' level of unemployment is, in fact, full employment. It is fruitless, in this view, to try to decrease unemployment below this natural level: misguided attempts to do so only create inflation. Minimum wages, unions and other ‘market-inhibiting' measures will tend to increase natural rate of unemployment.


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