The natural rate of unemployment (also known as NAIRU — Non-Accelerating Inflation Rate of Unemployment) is the unemployment rate that exists when the economy is at full employment. It includes frictional and structural unemployment but excludes cyclical unemployment.
Components
Frictional unemployment — Workers transitioning between jobs, recent graduates entering the workforce
Structural unemployment — Mismatch between worker skills and job requirements due to technology or industry changes
Cyclical unemployment — Caused by economic downturns; equals zero at the natural rate
Why It Matters
Central banks use NAIRU to guide monetary policy. If actual unemployment falls below the natural rate, inflation tends to rise. If it exceeds the natural rate, the economy has slack and may need stimulus.