What constitutes the "natural rate of unemployment"?

The natural rate of unemployment refers to the normal level of unemployment that exists in an economy when it is operating at full capacity, without cyclical fluctuations caused by economic downturns. This rate includes frictional and structural unemployment. Frictional unemployment occurs when individuals are temporarily between jobs or are entering the workforce for the first time. Structural unemployment arises from shifts in the economy that create a mismatch between the skills of workers and the needs of employers.

By considering only frictional and structural unemployment, the natural rate of unemployment reflects the underlying dynamics of the labor market under normal economic conditions. It indicates the healthy turnover of employment while also accounting for longer-term changes in industries or job qualifications that may leave some workers unemployed temporarily.

In contrast, scenarios such as recession (which leads to higher unemployment rates due to lack of demand for labor) or only focusing on cyclical unemployment do not capture the broader and more stable economic conditions that define the natural rate. Therefore, the answer that encompasses both the frictional and structural components accurately reflects the concept of the natural rate of unemployment.