Equilibrium unemployment is the level of unemployment that occurs when the labour market is balanced, meaning the number of people looking for work equals the number of available job vacancies.
It is caused by structural and frictional factors rather than a lack of aggregate demand in the economy.
The two main components are:
- Structural unemployment: A mismatch between the skills workers have and the skills that employers need.
- Frictional unemployment: The time it naturally takes for workers to search for and transition into suitable new jobs.
When the labour market is stable at the current wage level, any remaining unemployment is considered the equilibrium rate. This is also commonly referred to as the natural rate of unemployment.