What characterizes the natural rate of unemployment?

The natural rate of unemployment is best characterized as the level of unemployment during long-term economic equilibrium. This rate consists of frictional and structural unemployment, which are the normal types of unemployment present in a healthy, functioning economy. The natural rate does not fluctuate with the business cycle in the same way that cyclical unemployment does, which is related to economic downturns or recessions.

In contrast to other definitions, including the inclusion of all forms of unemployment or being defined arbitrarily by policy, the natural rate represents the baseline level of unemployment that the economy naturally maintains when it is at full employment. This means that at this rate, the economy is not experiencing excessive inflation or deflation, and resources are allocated efficiently.

By understanding this concept, we see how the natural rate serves as a benchmark to gauge labor market conditions and the overall health of the economy in relation to potential output.