The New Palgrave Dictionary of Economics

Living Edition
| Editors: Palgrave Macmillan

Natural Rate of Unemployment

  • J. Haltiwanger
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DOI: https://doi.org/10.1057/978-1-349-95121-5_716-1
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Abstract

In a dynamic economy there are several sources of unemployment. The turnover of the labour force due to life-cycle employment changes in the presence of search costs generates frictional unemployment. The changing output mix of the economy requiring reallocation of labour across sectors in the presence of search and mobility costs generates structural unemployment. Labour contract theory tells us that incentives for long-term attachments induce optimal temporary layoffs as a means of maintaining profitable labour force attachments during temporary slumps. Frictional, structural, and contractual unemployment can all be interpreted with the labour market being in dynamic equilibrium. The natural rate of unemployment is the rate towards which the dynamic system is converging for a given underlying general equilibrium stochastic structure. It takes into account the actual structural characteristics of the labour and commodity markets, including market imperfections, search and mobility costs.

Keywords

Labour Force Unemployment Rate Natural Rate Inflow Rate Outflow Rate 
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Copyright information

© The Author(s) 1987

Authors and Affiliations

  • J. Haltiwanger
    • 1
  1. 1.