The natural rate of unemployment is the level of unemployment that exists in an economy when it is operating at its full potential. It is also referred to as the non-accelerating inflation rate of unemployment (NAIRU).

The natural rate of unemployment is made up of two components: frictional unemployment and structural unemployment. Frictional unemployment occurs when individuals are in the process of moving between jobs or entering the workforce for the first time. Structural unemployment, on the other hand, is caused by a mismatch between the skills and qualifications of workers and the available job opportunities.

The natural rate of unemployment is considered to be unavoidable and necessary for a well-functioning labor market. It is not zero because there will always be some level of friction and structural factors impacting the ability of individuals to find suitable employment.

Economists and policymakers use the natural rate of unemployment as a benchmark to assess the health of an economy and to make decisions regarding monetary and fiscal policy. When the actual rate of unemployment is below the natural rate, it is an indication of an economy operating above its potential and can be a sign of inflationary pressures. Conversely, when the actual rate of unemployment is above the natural rate, it suggests that the economy is operating below its potential and there is room for expansionary policies to stimulate economic growth.