Full employment doesn't equate to a zero unemployment rate.

Rather, policymakers aim for the lowest possible unemployment rate that the economy can sustain without triggering a rise in inflation.

This brings us to the pivotal concept of the natural rate of unemployment.

The natural rate of unemployment is a cornerstone in economic theory.

It's the unemployment level that coexists with a stable inflation rate.

Think of it as the normal pulse of the economy, the balance point where the labor market is in a long-term equilibrium and not swayed by short-term cyclical influences.

This rate factors in both frictional and structural unemployment, which are present even when the economy is humming along without major disruptions.

Cyclical unemployment, which corresponds with the economic booms and busts, is not included in this.

Economic theory suggests that when unemployment aligns with this natural rate, the inflation rate should remain unaffected by labor market pressures.

However, should unemployment drop below this level, we typically see inflation picking up pace.

Conversely, if unemployment exceeds the natural rate, inflation often slows down.

While the idea may seem clear, cut the natural rate of unemployment or its other names, the non accelerating inflation rate of unemployment, NAIRU, or the non-cyclical rate of unemployment, is not just a figure set in stone.

It can't be pinpointed with precision, but must be estimated.

Moreover, it's not static.

It shifts in response to changes in the economy, labor market dynamics, demographic shifts, and so on.

It's also worth noting that the general concept is not without controversy.

Some economists challenge the robustness of the relationship between unemployment and inflation as posited by the NAIRU.

The difficulty in accurately determining this rate also calls into question its practical utility in policymaking.