A Unified Approach to Measuring u*

76 Pages Posted: 24 May 2019

See all articles by Richard K. Crump

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Stefano Eusepi

University of Texas at Austin

Marc P. Giannoni

Federal Reserve Banks - Federal Reserve Bank of Dallas; Center for Economic Policy Research (CEPR)

Aysegul Sahin

Federal Reserve Bank of New York

Date Written: May 1, 2019

Abstract

This paper bridges the gap between two popular approaches to estimating the natural rate of unemployment, u*. The first approach uses detailed labor market indicators, such as labor market flows, cross-sectional data on unemployment and vacancies, or various measures of demographic changes. The second approach, which employs reduced-form models and DSGE models, relies on aggregate price and wage Phillips curve relationships. We combine the key features of these two approaches to estimate the natural rate of unemployment in the United States using both data on labor market flows and a forward-looking Phillips curve that links inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment was around 4.0 percent toward the end of 2018 and that the unemployment gap was roughly closed. Identification of a secular downward trend in the unemployment rate, driven solely by the inflow rate, facilitates the estimation of u*. We identify the increase in labor force attachment of women, decline in job destruction and reallocation intensity, and dual aging of workers and firms as the main drivers of the secular downward trend in the inflow rate.

Keywords: firm dynamics, demographics, business dynamism, macroeconomics

JEL Classification: D22, E24, J11

Suggested Citation

Crump, Richard K. and Eusepi, Stefano and Giannoni, Marc P. and Sahin, Aysegul, A Unified Approach to Measuring u* (May 1, 2019). FRB of New York Staff Report No. 889 (2019), Available at SSRN: https://ssrn.com/abstract=3392998 or http://dx.doi.org/10.2139/ssrn.3392998

Richard K. Crump (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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Stefano Eusepi

University of Texas at Austin ( email )

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Marc P. Giannoni

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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Center for Economic Policy Research (CEPR)

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Aysegul Sahin

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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