The sum of the frictional and structural unemployment rates is called the natural rate of unemployment. Unemployment is at its natural rate when the rate of cyclical unemployment is zero.

When real GDP falls below potential GDP, cyclical unemployment increases. When real GDP increases, cyclical unemployment decreases. Structural unemployment arises from a mismatch of employer needs and workers’ skills and is not directly related to cyclical changes in GDP growth.

Cyclical unemployment is unemployment caused by a change in the general level of economic productivity. When cyclical unemployment is zero, the economy is said to be operating at full employment.

Note: When the economy is operating at less than full capacity, positive levels of cyclical unemployment will be present. At levels above full capacity, negative cyclical unemployment will exist.

The natural rate of unemployment is that rate of unemployment present when the economy is at its full employment rate of production or output. At full employment, both structural and frictional unemployment still exist. Therefore, there is some level of unemployment, and the natural rate of unemployment is not equal to zero.

The “number unemployed divided by the number in the labor force” is the definition of the rate of unemployment. There is no magical number or parameter that indicates full employment.

Full employment is reached when cyclical unemployment is zero.