Friedman-Phelps model is based on the notion of natural rate of unemployment. It is the rate of unemployment to which the economy returns in the long run after the stabilisation policies are correctly anticipated by the people. The natural rate of unemployment consists of two kinds of unemployment:

(i) Frictional unemployment or the type of unemployment experienced by people who are between steady jobs.

(ii) Unemployment due to rigidities in the economic system and its interferences with labour mobility or wage rate changes. Various rigidities and interferences are:

(a) Union activity which restricts supply of labour;


(b) Licensing arrangements granted by regulatory agencies;

(c) Minimum wages laws and

(d) Welfare system that reduces incentives to work.

According to Friedman, stabilising policy can affect only frictional unemployment and that also temporari­ly by fooling the buyers and sellers of labour. Phillips curve trade-off simply represents a temporary change in the frictional unemployment.