An Evaluation of the Inflationary Pressure Associated with Short- and Long-Term Unemployment

22 Pages Posted: 19 Apr 2014

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: March 21, 2014

Abstract

In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed. This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation. However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation. We present a model illustrating these issues and apply the model to data for U.S. metropolitan regions. We find that that short- and long-term unemployment exert equal downward pressure on price inflation.

Keywords: short-term unemployment, phillips curve

JEL Classification: E3

Suggested Citation

Kiley, Michael T., An Evaluation of the Inflationary Pressure Associated with Short- and Long-Term Unemployment (March 21, 2014). FEDS Working Paper No. 2014-28. Available at SSRN: https://ssrn.com/abstract=2426181 or http://dx.doi.org/10.2139/ssrn.2426181

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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