The Natural Rate of Unemployment

Fast economic growth tends to reduce the unemployment rate. So how low can the unemployment rate go? You might be tempted to say zero, but that isn’t feasible. Over the past half-century, the national unemployment rate has never dropped below 2.9%.

How can there be so much unemployment even when many businesses are having a hard time finding workers? To answer this question, we need to examine the nature of labor markets and why they normally lead to substantial measured unemployment even when jobs are plentiful. Our starting point is the observation that even in the best of times, jobs are constantly being created and destroyed.