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Natural rate of unemployment

The lowest rate of unemployment that can be sustained without increasing inflation and therefore the rate of unemployment when the labour market is in equilibrium. This type of unemployment can be calculated by adding together the level of structurally and frictionally unemployed workers in the economy at a point in time (supply-side types of unemployment).

Below is a diagram to illustrate the level of the NRU in an economy. As can be seen the NRU is the difference between those who would like a job at the current prevailing wage rate and those who are willing to take a job.

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