The U.S. job market in 2025 is rough and uneven.
With government data frozen during the shutdown, economists are relying on private data, and the numbers aren’t great. Moody’s calls job growth “paltry,” noting that the U.S. added only 22,000 new roles in August, while September’s gains (about 60,000 jobs, per Revelio Labs) came almost entirely from education and healthcare in just three states: California, New York, and Massachusetts.
For workforce agencies, those figures are the frontline reality. Some regions are flooded with job seekers after layoffs, while others can’t fill critical roles, and automation and AI are quietly cutting or reshaping jobs.
In this environment, knowing why unemployment rises matters as much as how high it goes.
That’s why the natural rate of unemployment matters.
Understanding it will help you distinguish between short-term turbulence and deeper structural issues, and design programs that target the real issue and create meaningful solutions.
In this article, you’ll learn:
- What is the natural unemployment rate, how it’s calculated, and what it means for your program.
- Cyclical, structural, and frictional unemployment, and how to tweak programs for each.
- What signals you should watch for to distinguish between temporary slack and deeper issues.
What Is the Natural Rate of Unemployment
The natural rate of unemployment is the level of joblessness an economy has even when it’s running smoothly, meaning, when everyone who wants a job can realistically find one, given time, skills, and mobility.
It’s the baseline, not a crisis signal.
Natural rate of unemployment formula – how it’s calculated
Economists typically define the natural rate as the sum of frictional unemployment (when people are in-between jobs) and structural unemployment (when workers’ skills no longer match available jobs).
So:
Natural rate = frictional unemployment + structural unemployment.
The Bureau of Labor Statistics (BLS) and the Federal Reserve estimate the natural rate by analyzing long-term data on wages, job openings, productivity, and labor participation.
Of course, the number isn’t fixed. It shifts with changes in technology, demographics, and labor policies. For example, when automation accelerates or when more people delay retirement, the natural rate adjusts accordingly.
Take AI adoption in industries like finance and retail.
It’s displacing some administrative jobs while creating demand for data and tech skills, temporarily pushing the natural rate up. On the flip side, when older workers stay employed longer, often because they’re healthier and living longer, it expands the labor force and can tighten the job market, bringing the natural rate down.
What is NAIRU and how it relates to the natural rate of unemployment
You’ll often hear economists use a term NAIRU, or the Non-Accelerating Inflation Rate of Unemployment. It’s the point where unemployment is low enough to keep people working but not so low that it triggers inflation.
In simpler terms:
- If unemployment drops below NAIRU, employers start competing for scarce workers and wages rise quickly. This wage growth then leads to upward pressure on inflation.
- If it’s above NAIRU, it can signal weak demand and higher joblessness.
For workforce agencies, NAIRU matters because it’s the bridge between labor market trends and economic policy.
When the economy runs below its sustainable employment level, agencies can expect slower hiring, tighter budgets, and more demand for reemployment services.
When it runs above, there’s room to focus on training, advancement, and long-term upskilling rather than rapid job placement.
What the natural rate of unemployment means for workforce agency programs
Understanding the natural rate will help you design programs that match economic reality.
Here’s how it translates into action:
- Know the baseline: Naturally, some level of unemployment will always exist, it’s not necessarily a sign of failure. Recognizing this helps set realistic expectations for placement and outcomes.
- Target programs strategically:
- When unemployment is above the natural rate, prioritize short-term job search and placement initiatives.
- When it’s near or below the natural rate, focus on reskilling and skill-building programs to address structural gaps.
- Allocate resources smarter: Direct funding where it has the most impact — rapid reemployment programs during downturns, or training partnerships when industries are shifting.
- Plan for the future: The natural rate isn’t static. Tracking it over time helps anticipate when your region may need to pivot from recovery mode to talent development mode.
To illustrate — imagine a regional workforce agency in Michigan.
During the 2020 pandemic, unemployment surged well above the natural rate, so the agency prioritized short-term job placement and rapid reemployment programs. They partnered with local employers to fill essential roles quickly and focused on getting people back into the labor market.
A few years later, as the economy stabilized and unemployment fell closer to its natural rate, the same agency shifted its strategy. Employers were now struggling to find candidates with the right skills rather than enough applicants.
In response, the agency redirected funding toward reskilling and sector-based training programs in areas like healthcare and advanced manufacturing.
This kind of adjustment illustrates how understanding the natural rate can help you align your efforts with real labor market conditions.
Types of Unemployment
Understanding why people are out of work helps you design better programs to get them back in faster.
Let’s break down the main types of unemployment and how to fine-tune your workforce initiatives for each.
Cyclical unemployment
Cyclical unemployment rises when the economy slows down — businesses cut back, hiring freezes, layoffs happen, and job seekers outnumber open positions.
It’s the unemployment caused by the economic cycle itself, not individual skills or effort.
How to adjust your workforce program based on cyclical unemployment
- Prioritize rapid re-employment. Create fast-track job placement programs that match displaced workers with sectors that are still hiring.
- Offer short-term skill bridging. Fund accelerated bootcamps or microcredentials that help workers pivot into in-demand roles within weeks, not months.
- Use subsidized or transitional employment. Partner with local employers to provide temporary wage subsidies or on-the-job training programs to keep people connected to the labor market while demand recovers.
Structural unemployment
Structural unemployment happens when there’s a mismatch between the skills workers have and the skills employers need, often due to automation, globalization, or industry shifts (like coal mining to clean energy — or what’s currently happening with AI-related layoffs).
How to adjust your workforce program based on structural unemployment
- Double down on targeted upskilling. Use local labor market data to pinpoint growing industries and design training around them (for example, retraining manufacturing workers for advanced production or clean energy roles).
- Build industry partnerships. Collaborate with employers early to co-design training curricula and ensure a direct job pipeline after completion.
- Support geographic mobility. Offer relocation assistance or remote-work readiness programs to help workers access opportunities outside their immediate area.
Frictional unemployment
Frictional unemployment is the natural short-term unemployment that happens when people switch jobs, move to new cities, or enter the labor force after school. It’s not necessarily a problem, but reducing the time people spend “in between” jobs boosts employment levels overall.
How to adjust your workforce program based on frictional unemployment
- Streamline job matching. Use matching tools and resume optimization resources to help candidates quickly align with the right openings.
- Enhance interview readiness. Offer coaching on behavioral interviews and personal branding to help candidates present themselves confidently and secure offers faster.
- Leverage referrals and networks. Build community-based or alumni referral programs that connect job seekers to employers directly. This will cut the average job search time.
Unemployment Rate in the US Today
The U.S. unemployment rate has edged up slightly in 2025, influenced in part by AI-driven layoffs affecting entry-level and routine jobs, especially in tech and administrative sectors.
AI is definitely reshaping the labor market by automating tasks, but this shift is occurring alongside broader economic factors, like slower hiring and market uncertainty.
For workforce agencies, it’s important to look beyond headline unemployment numbers.
Look at key indicators like:
- The length of unemployment
- Labor force participation rates
- Sectors where job losses occur
This will give you deeper insight into whether the current unemployment reflects temporary economic slowdowns or more persistent structural changes.
AI-related job displacement shows the growing need for targeted reskilling efforts focused on AI literacy, digital skills, and complementary human abilities like critical thinking and communication.
If you can closely monitor labor market signals and align training programs with emerging job demands, you’ll be able to better support workers through this transition and help them find new employment opportunities.
Summary of the Main Points
- Understanding the natural rate of unemployment will help you tell the difference between short-term fluctuations and long-term structural problems in employment — and design programs that address the real issue.
- The natural rate of unemployment is the joblessness that remains even in a healthy economy, when anyone who wants a job can find one, given enough time and the right skills.
- When unemployment rises above the natural rate, your program should focus on short-term job search and placement efforts.
- When it’s at or below that level, shift to reskilling and training programs that tackle deeper skill mismatches.
- During cyclical unemployment, focus on rapid re-employment through fast-track placement, short-term upskilling, and subsidized or transitional jobs that keep workers active until the economy rebounds.
- When structural unemployment hits, focus on targeted upskilling tied to growing industries, employer partnerships that create clear job pipelines, and mobility support to connect workers with new opportunities.
- To address frictional unemployment, streamline job matching, boost interview readiness, and use referral networks to help people land new roles faster.
FAQ
What type of unemployment is created by a recession?
A recession creates cyclical unemployment — the kind that rises when the economy slows down. During a downturn, businesses cut spending, freeze hiring, and lay off workers, which leads to fewer available jobs overall. This type of unemployment isn’t caused by a lack of skills or motivation but by reduced demand across the economy. Once growth picks up, cyclical unemployment usually declines as companies start hiring again.
How to find natural rate of unemployment?
The natural rate of unemployment is estimated using economic data and models. Economists typically calculate it by adding frictional and structural unemployment rates. Another common method uses the Non-Accelerating Inflation Rate of Unemployment (NAIRU). It is the unemployment level at which inflation stays stable. In practice, agencies like the U.S. Federal Reserve or the Congressional Budget Office estimate it by analyzing long-term trends in unemployment, wage growth, and inflation.
What is the ideal unemployment rate?
Most economists consider 4% to 5% healthy for a strong, stable economy. At that level, nearly everyone who wants a job can find one within a reasonable time, yet there’s still enough movement in the labor market for businesses to hire and grow.
What is the natural rate of unemployment?
The natural rate of unemployment is the level of joblessness that exists even in a healthy, well-functioning economy. It includes people who are between jobs (frictional unemployment) or whose skills don’t match current openings (structural unemployment) and not those who are unemployed because of economic downturns. In other words, it’s the baseline level of unemployment an economy naturally maintains when operating at full capacity. For most developed countries, it typically falls between 4% and 5%.
