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OPPORTUNITY COST: The highest valued alternative foregone in the pursuit of an activity. This is a hallmark of anything dealing with economics--and life for that matter--because any action that you take prevents you from doing something else. The ultimate source of opportunity cost is the pervasive problem of scarcity (unlimited wants and needs, but limited resources). Whenever limited resources are used to satisfy one want or need, there are an unlimited number of other wants and needs that remain unsatisfied. Herein lies the essence of opportunity cost. Doing one thing prevents doing another.

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NATURAL UNEMPLOYMENT:

The combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium. Natural unemployment exists when the economy is at full employment, which for practical purposes is defined as the condition in which the quantity of resources demanded is equal to the quantity of resources supplied. Most important for policy purposes, natural employment exists with stable prices, that is, no inflation.
Frictional and structural unemployment are considered natural bi-products of a healthy, expanding economy. While they can be reduced through improved information, training, and education, total elimination is probably undesirable and likely impossible. The inherent tendency for an economy to have some degree of frictional and structural unemployment gives rise to the notion of natural unemployment.

In principle, full employment exists when all resources (especially labor) are fully engaged in the production of goods and services, that is, full employment puts the economy ON the production possibilities frontier. However, in practice and in terms of macroeconomic policy, full employment is best viewed as the condition that exists after cyclical unemployment has been eliminated by preventing or correcting business-cycle contractions. This leaves frictional and structural unemployment (ignoring the seasonal variety which is largely irrelevant to macroeconomic policy).

When policy makers use the term full employment, they do not mean that absolutely everyone one has a job at any given moment. What they mean is that cyclical unemployment has been eliminated. What remains are frictional and structural unemployment that is a natural part of the economy.

With the labor and other resource markets in equilibrium, there is no pressure for wages or other resource prices to change. If resource prices remain stable, then production cost and output prices remain stable. In fact one of the more important policy aspects is that natural employment can persist with NO inflation.

A few observations about natural unemployment are order:

  • One, natural unemployment is the combination of frictional and structural unemployment. The economy will always have some degree of frictional and structural unemployment.

  • Two, frictional and structural unemployment do not result from the lack of available jobs, only from the problems of getting workers and jobs together. In other words, the quantity demanded equals the quantity supplied. Natural unemployment is thus, from a practical viewpoint, considered synonymous with full employment.

  • Three, because the demand and supply quantities are equal, there is no pressure on factor prices (wages) to change. As such, natural unemployment can be sustained with no changes in inflation. The same cannot be said about cyclical unemployment.

  • Four, because natural unemployment can be sustained without affecting inflation, it provides an excellent target for macroeconomic stabilization policies. Policies that achieve and maintain ONLY natural unemployment essentially eliminate ALL business-cycle instability.
Because of the policy importance of natural unemployment, a significant amount of controversy exists over the actual level, as measured by the unemployment rate. Some economists and political leaders contend this rate in the range of 6 percent. Others contend it is lower, 5.5 percent, 5 percent, or even less.

The appropriate natural unemployment is not simply a high-brow, academic discourse among pointy-headed economists either. If the economy has reached the natural unemployment level, then the government need take no further action to move it lower. Doing so, in fact, would trigger inflation.

However, the difference between 6 percent and 5 percent unemployment in the U.S. economy is well over a 1 million workers. This corresponds to almost $300 billion worth of goods and services. "Settling" for a higher natural unemployment rate that actually includes some cyclical unemployment, at the very least, condemns these workers to temporary hardships and prevents the rest of the economy from enjoying a few hundred billions dollars worth of production.

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Recommended Citation:

NATURAL UNEMPLOYMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 23, 2018].


Check Out These Related Terms...

     | unemployment sources | cyclical unemployment | seasonal unemployment | frictional unemployment | structural unemployment | unemployment rate | Current Population Survey | labor force | unemployment problems | employment-population ratio | alternative unemployment rates | unemployment reasons |


Or For A Little Background...

     | unemployment | factors of production | full employment | business cycles | contraction | recession | circular flow | macroeconomic goals | macroeconomic problems |


And For Further Study...

     | labor force participation rate | unemployment, production possibilities | full employment, production possibilities | macroeconomic sectors | Bureau of Labor Statistics | real gross domestic product | macroeconomic markets | resource markets | inflation | stabilization policies | government functions | inflation |


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     | Bureau of Labor Statistics |


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