The natural rate of unemployment refers to the lowest level of unemployment that can be sustained by an economy without increasing the rate of inflation. This function depends on certain economic factors i.e. minimum wage legislation, the power of trade union organizations and mobility restrictions between jobs. The natural rate of unemployment indicates that unemployment cannot be permanently reduced just by increasing demand as it will just result in higher inflation.
The Classical theory of unemployment assumes that the employment market behaves as described in the supply and demand model; the interaction of market forces to set the equilibrium wage rate and employment. According to the classical theory, unemployment can only exist when something gets in the way of market forces
Classical unemployment occurs when real wages for jobs are forced above the market clearing level thus leading to an excess supply of labour. If wages are high in relation to productivity, then businesses will not be able to employ all labour on offer and stay profitable at the same time. It can be argued that introducing the national minimum wage has created classical unemployment in markets where wage rates average lower than the national minimum wage level and where there is competition between low-labour cost industries.
The Keynesian theory falls under cyclical unemployment. This type of unemployment is also known as demand deficient unemployment and is caused by a lack of aggregate demand for goods and services in an economy. When the economy enters a different stage of the business cycle such as downturn, firms