AP Syllabus focus: ‘Factors that change the natural rate of unemployment shift the long-run Phillips curve.’
The long-run Phillips curve (LRPC) links inflation to the economy’s natural rate of unemployment. When labour-market fundamentals change, the natural rate changes, and the LRPC shifts left or right.
Core idea: the LRPC shifts when the natural rate changes
In the long run, unemployment tends to return to a level determined by the structure of the labour market rather than by aggregate demand. The LRPC is drawn as a vertical line at that unemployment rate; a change in that rate moves the entire vertical line.
This diagram pairs the long-run aggregate supply curve (vertical LRAS) with the long-run Phillips curve (vertical LRPC). It reinforces the long-run result that changes in aggregate demand can change the price level (and therefore inflation) but do not change long-run output or the unemployment rate, which remains pinned at the natural rate. Source
Natural rate of unemployment: The long-run unemployment rate consistent with equilibrium in the labour market, typically made up of frictional unemployment and structural unemployment.
A lower natural rate means the economy can sustain lower unemployment in the long run without generating accelerating inflation; a higher natural rate means the opposite.
Long-run Phillips curve (LRPC): A vertical relationship between inflation and unemployment showing that, in the long run, inflation is not systematically related to unemployment; it is located at the natural rate of unemployment.
How to recognise an LRPC shift on the graph
Direction of the shift
This figure shows a downward-sloping short-run Phillips curve (SRPC) alongside a vertical long-run Phillips curve (LRPC) located at the natural rate (NAIRU). It visually illustrates that policy can move the economy along the SRPC in the short run, but in the long run unemployment returns to the natural rate while inflation outcomes depend on expectations. Source
Natural rate decreases LRPC shifts left
Long-run unemployment is lower (the vertical line moves to a smaller unemployment rate).
Natural rate increases LRPC shifts right
Long-run unemployment is higher (the vertical line moves to a larger unemployment rate).
What does not cause an LRPC shift
A change in aggregate demand may move the economy to different points in the short run, but by itself it does not change the labour market’s long-run equilibrium unemployment rate. For the LRPC to shift, the underlying natural rate must change.
Why the natural rate changes: key labour-market fundamentals
Frictional unemployment changes (job search and matching)
Frictional unemployment reflects the time it takes for workers and firms to find good matches. The natural rate can fall when matching becomes faster or more efficient, and rise when matching becomes slower.
Factors that can lower frictional unemployment:
Better job information and matching (e.g., improved search platforms, clearer credentialing)
More geographic or occupational mobility (e.g., easier relocation, transferable licensing)
Factors that can raise frictional unemployment:
Reduced mobility (e.g., housing lock-in, high moving costs)
Longer job search durations due to weaker matching institutions
Structural unemployment changes (skills and industry composition)
Structural unemployment comes from a persistent mismatch between workers’ skills/locations and employers’ needs.
Factors that can lower structural unemployment:
Workforce training, re-skilling, and education aligned with labour demand
Adaptable credential systems and apprenticeships that speed transitions across sectors
Factors that can raise structural unemployment:
Rapid technological change that makes existing skills obsolete
Major industry shifts (e.g., long-term decline of a region’s dominant industry) without effective worker retraining
Structural unemployment: Unemployment resulting from a mismatch between workers’ skills (or locations) and the skills (or locations) demanded by employers.
Labour-market policies and institutions (incentives and flexibility)
Rules and incentives influence how quickly wages and employment adjust and how strong the incentive is to accept available jobs.
Policies/institutions that can raise the natural rate (shift LRPC right) by increasing unemployment duration or reducing hiring:
More generous or longer-lasting unemployment benefits (may reduce urgency of job acceptance or raise reservation wages)
Higher or more binding minimum wages in affected labour markets (can reduce quantity of labour demanded for low-skill jobs)
Stronger barriers to hiring/firing (can reduce vacancy creation and slow reallocation)
Policies/institutions that can lower the natural rate (shift LRPC left) by improving incentives and matching:
Hiring subsidies or targeted employment programmes
Reduced obstacles to labour mobility (e.g., streamlined occupational licensing)
Effective active labour-market policies focused on placement and training
Demographics and labour-force composition
The natural rate depends partly on who is in the labour force and their typical job-search patterns.
Changes that can raise the natural rate:
A larger share of workers who are new entrants or frequently changing jobs (tends to increase frictional unemployment)
Changes that can lower the natural rate:
A more experienced workforce with stronger job networks and stable career paths (tends to reduce search time)
Interpreting an LRPC shift in long-run equilibrium
An LRPC shift changes the economy’s long-run unemployment benchmark:
If the natural rate falls, long-run equilibrium occurs at lower unemployment (LRPC left), meaning the economy can operate with less unemployment in the long run.
If the natural rate rises, long-run equilibrium occurs at higher unemployment (LRPC right), indicating more persistent unemployment even after long-run adjustments.
Because the LRPC is about long-run outcomes, explanations should focus on structural features (skills, matching efficiency, incentives, flexibility, composition) rather than short-run demand conditions.
FAQ
They infer it using multiple approaches rather than observing it directly.
Common methods include:
Statistical filters on unemployment (trend–cycle decomposition)
Models linking wage growth/inflation to labour-market slack
“Beveridge curve” evidence (vacancies vs unemployment) to gauge matching efficiency
Estimates are uncertain and revised as new data arrive.
They are closely related but not always identical.
NAIRU is the unemployment rate consistent with non-accelerating inflation in empirical models. The natural rate is a broader theoretical concept based on labour-market equilibrium. In many AP-style contexts, they are treated as effectively the same long-run benchmark.
It can change at different speeds depending on the driver.
Slow-moving: demographics, education levels
Potentially faster: policy changes to benefits or hiring rules, sudden sectoral shifts, rapid technology adoption
However, measuring “quick” changes is difficult because estimates lag real-time developments.
Hysteresis is the idea that prolonged high unemployment can raise the future natural rate.
Channels include:
Skill atrophy among the long-term unemployed
Reduced attachment to the labour force
Employer stigma against long unemployment spells
If hysteresis occurs, the LRPC could shift right after a deep, long recession.
Yes. Different regions can have different matching efficiency, industry mix, mobility, and institutions.
Examples of region-specific influences:
Dependence on declining industries
Housing affordability limiting relocation
Local training pipelines and employer networks
National LRPC analysis abstracts from these differences but they matter for interpreting data.
Practice Questions
Question 1 (1–3 marks) State two factors that could decrease the natural rate of unemployment and indicate what happens to the LRPC.
1 mark: Identifies one valid factor that decreases the natural rate (e.g., improved job matching, effective retraining, reduced occupational licensing barriers).
+1 mark: Identifies a second valid factor.
+1 mark: States that the LRPC shifts left (to a lower unemployment rate).
Question 2 (4–6 marks) Explain how a rise in structural unemployment affects the natural rate of unemployment and the position of the LRPC. In your answer, refer to labour-market mismatch and one policy or institutional feature.
1 mark: Defines or correctly describes structural unemployment as skills/location mismatch.
1 mark: Explains that higher structural unemployment raises the natural rate of unemployment.
1 mark: States that the LRPC shifts right (to a higher unemployment rate).
1 mark: Explains the mismatch mechanism (e.g., displaced workers lack in-demand skills, slower reallocation across industries).
1 mark: Links one policy/institution to persistence (e.g., weak retraining, occupational licensing barriers, hiring/firing restrictions) and explains how it worsens mismatch or slows adjustment.
1 mark: Uses correct Phillips-curve language (LRPC position determined by natural rate; long-run benchmark unemployment changes).
