The Recent Evolution of the Natural Rate of Unemployment

40 Pages Posted: 11 Jul 2011

See all articles by Mary C. Daly

Mary C. Daly

Federal Reserve Bank of San Francisco

Bart Hobijn

ASU

Robert G. Valletta

Federal Reserve Bank of San Francisco; IZA Institute of Labor Economics

Abstract

The U.S. economy is recovering from the financial crisis and ensuing deep recession, but the unemployment rate has remained stubbornly high. Some have argued that the persistent elevation of unemployment relative to historical norms reflects the fact that the shocks that hit the economy were especially disruptive to labor markets and likely to have long lasting effects. If such structural factors are at work they would result in a higher underlying natural or nonaccelerating inflation rate of unemployment, implying that conventional monetary and fiscal policy should not be used in an attempt to return unemployment to its pre-recession levels. We investigate the hypothesis that the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. We begin by reviewing a standard search and matching model of unemployment, which shows that two curves – the Beveridge curve (BC) and the Job Creation curve (JCC) – determine equilibrium unemployment. Using this framework, our joint theoretical and empirical exercise suggests that the natural rate of unemployment has in fact risen over the past several years, by an amount ranging from 0.6 to 1.9 percentage points. This increase implies a current natural rate in the range of 5.6 to 6.9 percent, with our preferred estimate at 6.25 percent. After examining evidence regarding the effects of labor market mismatch, extended unemployment benefits, and productivity growth, we conclude that only a small fraction of the recent increase in the natural rate is likely to persist beyond a five-year forecast horizon.

Keywords: equilibrium unemployment, Beveridge curve, structural unemployment, mismatch

JEL Classification: E24, J3, J6

Suggested Citation

Daly, Mary Colleen and Hobijn, Bart and Valletta, Robert G., The Recent Evolution of the Natural Rate of Unemployment. IZA Discussion Paper No. 5832. Available at SSRN: https://ssrn.com/abstract=1882851

Mary Colleen Daly (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Bart Hobijn

ASU ( email )

501 E. Orange Street
Tempe, AZ 85287-9801
United States
(480)-965-0215 (Phone)

HOME PAGE: http://www.barthobijn.net

Robert G. Valletta

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3345 (Phone)
415-977-4084 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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