Then natural rate of unemployment is a concept that was coined by Milton Friedman and Edmund Phelps, it represents the unemployment rate level that is consistent with the aggregate production in the long run in the absence of frictions as price adjustments of labor and goods. The occurrence of disturbances causes the actual unemployment level to continuously deviate from the natural rate on unemployment. Reduction of the natural rate of unemployment can be achieved through government policies that affect the supply side of the economy.

Unemployment is the percentage measure of unemployed people in an economy and also an indicator of idle resources, as an economy gets near full employment the greater is rate of inflation and the greater is the rate of employment, this is indicated by the Phillips curve and also Keynes model of national income. [1]



Phillips curve


The above diagram depict the Phillips curve, this curve depicts that there exist a negative relation ship between unemployment and inflation.

The natural rate of income is the income level that exist in an economy in the long run in absence of temporary business fluctuations, this natural rate of income is a good measure of the national income for policy making since it the one most likely to exist in an economy at full or close to full employment, the natural rate of income growth is the level of income derived from the difference of income after adjustments in an economy and this include inflation adjustment.

Therefore the natural rate of income, unemployment and income growth are useful tools used in policy making because they depict the optimum levels for income, unemployment and income growth.


Brian Snow (1997) Macroeconomics: Introduction to Macroeconomics, Rout ledge publishers, UK


[1] Snow (1997)