The Civilian Unemployment Rate and the Natural Rate of Unemployment

This Activity Exercise is appropriate for Principles of Macroeconomics, has no class size limitations, and is designed for completion in one 50 minute class period. The preparatory work can also be captured and evaluated by the instructor. It is the first in a sequence of five Activity Exercises designed by the author to explore basic macroeconomic principles and their measurement. The five Activity Exercises are: Unemployment Rate (1), Consumer Sentiment (2), Gross Private Domestic Investment Spending (3), Housing Starts Leading Indicator (4), and Investment Spending Multipliers (5). Students will need to be familiar with using and manipulating Federal Reserve Economic Data (FRED). See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Overview

The Activity Exercise Civilian Unemployment Rate and the Natural Rate of Unemployment can be used as an applied exercise for the measurement of both rates. Ideally, preparation for the Activity Exercise will familiarize students with the component types of unemployment and their role in determining the Natural Rate. The Activity Exercise asks students to apply that understanding to a specific case where conditions for hiring in the labor market may be introduced and considered.

Expected Student Learning Outcomes

At the completion of this Activity Exercise, students will be able to describe labor market conditions when the Civilian Unemployment Rate is lower than the Natural Rate of Unemployment.

Information Given to Students

You've taken a job as a business conditions advisor for Starbucks. Based on knowledge from his undergraduate macroeconomics class, the CEO thinks a Civilian Unemployment Rate (UNRATE) that is lower than the Natural Rate of Unemployment (NROU) could make it difficult to hire new baristas. He asks, what do you think?

You respond:

A. "The relationship between the UNRATE and the NROU has no bearing on our ability to hire new baristas."
B. "It's always hard for us to find and hire new baristas."
C. "You are correct, when the UNRATE is below the NROU, the labor market is 'tight.' During those times, we're competing with other businesses for scarce workers, which means we'll have to pay a higher wage to get the baristas we need to serve our customers."
D. "It doesn't matter if the UNRATE is lower than the NROU. There's always a surplus of college students available who need part time employment as baristas."

The Civilian Unemployment Rate and the Natural Rate of Unemployment (Microsoft Word 2007 (.docx) 129kB Jul16 18)

The correct answer is C. The main takeaway of this Activity Exercise is how "tight" labor markets work. The instructor can introduce the idea that "tight" labor markets can put students in a better bargaining position when it comes to negotiating their hiring wage and subsequent requests for a raise.

A. Fails to consider labor market wage pricing relative to the unemployment rate.

B. Generates interesting discussion, but does not allow for how labor scarcity may drive up wages.

D. Could create the most discussion, but tight labor markets may prevail even in communities with colleges and universities.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that task to submit in preparation for the Activity Exercise. Detailed instructions can be found here: "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Suggested Debriefing Discussion Questions:

What is the Natural Rate of Unemployment?
How do the kinds of unemployment (Frictional, Seasonal, and Structural)
determine the Natural Rate of Unemployment?
What conditions prevail, in the same case, if the UNRATE is above the NROU?

Students should be able to articulate that when the UNRATE is below the NROU, the labor market is 'tight' for employers, jobs are available, and wages may be rising. Instructor evaluation can be formulated through formal examination questions or presentation.

Watch the Khan Academy Video "Natural, Cyclical, Structural, and Frictional Unemployment Rates"

Read OpenStax Principles of Macroeconomics, 2e, Chapter 8, "Unemployment." Download for free.

PREP ASSIGNMENT (may be submitted in advance):

Instructions for accessing and manipulating FRED data are found in "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Access the FRED chart of data for the Natural Rate of Unemployment (NROU) Add a second line to the chart for the Civilian Unemployment Rate, Percent, Seasonally Adjusted (UNRATE).

Reformulate both lines to January, 1998 and change the frequency to Quarterly.

Save the completed chart for future reference.