The Natural Rate

1. At the natural rate the only unemployment left is people between jobs or mismatched, not people short of vacancies.
2. Because there is no excess demand for labour, wages and therefore prices are not being bid up → inflation is stable.
3. So the natural rate matches the unemployment that remains at the full-employment level of output.

What Makes It Up

1. Frictional unemployment comes from workers moving between jobs and searching for the right match.
2. Structural unemployment comes from skills and location mismatches as industries decline and others grow.
3. Seasonal unemployment follows the time of year, such as fewer tourism jobs in winter.

Determinants of the Natural Rate

1. The flexibility of the labour market affects how fast the unemployed are matched to vacancies → more flexibility lowers the rate.
2. The generosity and duration of unemployment benefits affect the incentive to search → more generous benefits tend to raise the rate.
3. The quality of education and training affects occupational mobility → better training lowers structural unemployment.
4. Hysteresis can raise the rate after a long spell of high unemployment erodes skills and work habits.

Policy Implications

1. The natural rate sets a floor that demand-side policy cannot easily cross, since it reflects supply-side frictions not weak demand.
2. Pushing unemployment below the natural rate creates excess demand for labour → wages and prices are bid up → inflation accelerates.
3. It depends on the tools used: lowering the natural rate itself needs supply-side policies such as training and benefit reform, not demand-side stimulus.