If people cannot find jobs because they have outdated skills—think hand weavers after the invention of the loom—they might become “structurally” unemployed.
But it is the trade-off between unemployment and inflation that most preoccupies central bankers.
John Maynard Keynes, the great British economist, took a first step towards the natural-rate hypothesis when he focused minds on “involuntary” unemployment.
In his book “The General Theory”, published in 1936 in the aftermath of the Depression, Keynes noted that many people could not find jobs at the going wage, even if they had comparable skills to those in work.
Classical economics blamed artificially high wages, perhaps caused by trade unions.
But Keynes pointed to lacklustre economy-wide spending.
Even if wages fell, he reasoned, workers would have less to spend, making the demand deficiency worse.
The answer, he thought, was for governments to manage aggregate demand in order to keep employment “full”.
Keynes was not the father of all that is now thought of as “Keynesian”.
Inflation, for instance, barely entered his analysis of unemployment.
But by the late 1960s Keynesianism had become associated with the idea that when managing aggregate demand, policymakers are not just choosing a rate of unemployment.
They are simultaneously choosing how fast prices rise.