Natural unemployment is the rate of unemployment due to normal labour market friction, when the labour market is in equilibrium. To elucidate the point we first take a look of the types of unemployment and the components of natural unemployment.
Unemployment can be categorised in into 3 broad categories:
a. Structural unemployment: As the economy evolves over time, the skill set required is also dynamically changing. The skills acquired by an individual may become obsolete in the future due to technological advancement. Thus the unemployment due to mismatch of skill set required by an industry and skills of an individual leads to structural unemployment.
b. Frictional unemployment: when an individual voluntarily leaves an organisation or is fired on some account, it takes some time for him to find a new job. This may be a temporary phase but the duration for which he is unemployed is accounted for in frictional unemployment.
c. Cyclical unemployment: This is due to the cyclical boom and bust in the economy. There are times when economy is growing fast and unemployment is at its minimum and during recession unemployment rises. Thus the shift in unemployment due to the change in the economy is called as cyclical unemployment.
Natural unemployment comprises of structural and frictional unemployment which exists irrespective of the condition in the economy. Thus even at times when economy is at optimal capacity i.e. at full employment level, natural unemployment exists.