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The natural rate of unemployment is the steady-state rate of unemployment. It depends on the rate of job separation and the rate of job finding.
Because it takes time for workers to search for the job that best suits their individual skills and tastes, some frictional unemployment is inevitable. Various government policies, such as employment insurance, alter the amount of frictional unemployment.
Structural unemployment results when the real wage remains above the level that equilibrates labour supply and labour demand. Minimum-wage legislation is one cause of wage rigidity. Unions and the threat of unionization are another. Finally, efficiency-wage theories suggest that, for various reasons, firms may find it profitable to keep wages high despite an excess supply of labour.
Whether we conclude that most unemployment is short-term or long-term depends on how we look at the data. Most spells of unemployment are short. Yet most weeks of unemployment are attributable to the small number of long-term unemployed.
The unemployment rates among demographic groups and among Canada’s regions differ substantially. In particular, the unemployment rates for younger workers are much greater than for older workers. This difference results from a difference in the rate of job separation rather than from a difference in the rate of job finding. Unemployment in the Maritimes is very high, and this is largely due to a lower rate of job finding.
The unemployment rate gradually drifted upward over the second half of the twentieth century. Various explanations have been proposed, including the changing demographic composition of the labour force, an increase in sectoral shifts, and skill-biased technological change. The natural unemployment rule has started drifting down again since the turn of the century.
American and European labour markets exhibit significant differences. In recent years, Europe has experienced considerably more unemployment than the United States, and employed Europeans work fewer hours than employed Americans.