1. Natural Rate of Unemployment
Full Employment is not zero

2. Cyclical
Structural
4-Types of
Unemployment
Seasonal
Frictional

3. Natural Rate of Unemployment
What: Unemployment that does not go away in long run
Also called “Full Employment” (know this!)
Rate without cyclical unemployment
Also, total of frictional & structural (seasonal is adjusted out)

4. Calculating the Natural Rate
Economists debate actual level
Was considered to be 5-6% before the 1990’s
2006 considered 4-5%
We will use
5% for
Natural rate
(Full Employment)
Critical Thinking:
Why is it lower today?
Many Reasons:
Improved Job. Info on internet
Temporary Work Agencies
New Welfare Laws

5. Unemployment Rate vs. Natural Rate
When is
the economy
clearly strong below?
Percent of
Labor Force 10
Unemployment rate 8 6
Natural rate of
unemployment 4
If unemployment rate is less than
Full Employment, things are good! 2
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
BUT!---inflationary pressures rise

6. 2-Types of Inflation Demand-Pull Inflation: Cost-Push Inflation
Too many dollars chasing too few goods
Spending increases faster than production
Demand Side Inflation
Cost-Push Inflation
Increase in cost of any factors of production (input prices)
examples: price of oil, labor, steel, etc….)
Supply Side Inflation

7. Low Unemployment & Inflation
Business competes for workers
Wages begin to increase =>
The cost of doing business rises
Leads to “cost push” inflation
As unemployment rate falls
Below full employment

8. Labor Force Participation: Men versus Women
Rate (in percent)
100
Men 80 60 40
Women 20
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005

9. Labor-Market Participation

10. Economic History
Analyze GDP, Unemployment & CPI data