Natural Rate of Unemployment

12 Key excerpts on "Natural Rate of Unemployment"

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  eBook - PDF

  Fundamentals of Labor Economics

  • Thomas Hyclak, Geraint Johnes, Robert Thornton, , Thomas Hyclak, Thomas Hyclak, Geraint Johnes, Robert Thornton(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Estimating the Natural Rate The Natural Rate of Unemployment is a theoretical concept, and there are no direct measures of its value. Attempts to estimate the value of the natural rate from data on the observed unemployment rate have taken a number of different paths, many of which have led to 4 Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58 (1968): 1–17. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. The Natural Rate of Unemployment 417 the coinage of alternative names for this theoretical concept. This proliferation of nomen- clature causes confusion and makes it necessary to consider alternative estimates and characterizations of the Natural Rate of Unemployment. Analysts have attempted to match numbers to the concept of the Natural Rate of Unemployment using four different tech- niques: the long-run equilibrium unemployment rate, the natural rate with full employment, a measure of noncyclical unemployment using moving averages, and the nonaccele- rating inflation rate of unemployment (NAIRU). Let’s examine each of these in turn. One easy way to estimate the natural rate is to assume that it is equivalent to the mean value of the actual unemployment rate over some period of time. In a statistical sense, the mean is the expected value of the unemployment rate, so we could conceivably think of this as an estimate of the long-run equilibrium unemployment rate. Looking at the US data in Figure 14.1, the mean is 6.08% over the years from 1991 to 2017.

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  Modern Labor Economics

  Theory and Public Policy

  • Ronald G. Ehrenberg, Robert S. Smith(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Another defines full employment as the rate of unemployment at which job vacancies equal the number of unemployed workers, and yet another defines it as the level of unemployment at which any increases in aggregate demand will cause no further reductions in unemployment. A variant of the latter defines the natural rate as the unemployment rate at which all unemployment is voluntary (frictional and perhaps seasonal). A final definition of the natural rate is that rate at which the level of unemployment is unchanging and both the flows into unemployment and the duration of unemployment are normal. 45 All the various earlier definitions try to define in a specific way a more general concept of full employment as the rate that prevails in “normal” times. If we assume that frictional and seasonal unemployment exist even in labor markets characterized by equilibrium (that is, markets having neither excess demand nor excess supply), it is clear that the Natural Rate of Unemployment is affected by such factors as voluntary turnover rates among employed workers, movements in and out of the labor force, and the length of time it takes for the unemployed to find acceptable jobs. These factors vary widely across demographic groups, so the natural rate during any period is strongly influenced by the demographic composition of the labor force. Unemployment and Demographic Characteristics Table 14.4 presents data on actual unemployment rates for various age/ race/gender/ethnic groups in 2015, a year in which the overall unemployment was a moderate 5.3 percent

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  On Unemployment

  A Micro-Theory of Economic Justice: Volume 1

  • Mark R. Reiff(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1.4 The Natural Rate Hypothesis There is one other form of unemployment that I should mention here just to make clear how it is related to what I will be discussing. This is what is called the Natural Rate of Unemployment. The Natural Rate of Unemployment is the frictional rate plus the structural rate, and (according to Milton Friedman and his followers) represents the minimum amount of unemployment we can have in an economy without taking measures that will produce an accelerating rate of inflation, which is why the natural rate is sometimes referred to as “the non- accelerating inflation rate of unemployment” or NAIRU for short. 41 It is true, of course, that the frictional rate plus the structural rate equals the natural rate— this is simply a mathematical truth established by stipulation. But the signifi- cance of this sum is controversial. Indeed, the natural rate is not even fixed—it is ever-changing and therefore hard to calculate, which is why there is little consensus on what it might be at any particular time. As a practical matter, it is often pegged at whatever the average rate of unemployment has been for the last few years, at least during periods of stable inflation, and it therefore rises and falls with the actual rate. 42 Combine this with the widely held view among sup- porters of the natural rate hypothesis that if left alone, the actual rate of unem- ployment will gravitate toward the natural rate, and the argument for the Natural Rate of Unemployment essentially and very conveniently boils down to this: the safest thing for government to do with regard to the problem of unemployment is nothing, except perhaps in moments of extreme crisis, and even then govern- ment’s efforts should be measured, short-lived, and tightly controlled, aimed merely at restoring unemployment to whatever level it was at before the crisis.

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  Foundations of Real-World Economics

  What Every Economics Student Needs to Know

  • John Komlos(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  These structural characteristics include the cost of searching for a job or the time needed to find a match between suppliers and demanders of labor. Theoretically, a lower rate of unemployment would be possible temporarily but at a cost of increasing the rate of inflation, and in the long run unemployment would return to its “natural” level at a higher inflation rate. Thus, it would be futile to use monetary or fiscal policy to force the unemployment rate below its natural rate. It would only lead to inflation. Thus, the Natural Rate of Unemployment is the non-inflationary equilibrium in the labor market, according to conservative economists such as Ben Bernanke or Martin Feldstein, who confidently refer to 5% level of unemployment as “full employment.” 28 At the January 2016 meeting of the American Economic Association in San Francisco, Feldstein declared that “Fortunately, the U.S. economy is now in very good shape. We are essentially at full employment with the overall unemployment rate at 5%.” Ten months before Trump’s triumph, he neglected the frustration of the underemployed masses. Thus, 5% unemployment must be tolerated since it is inevitable. 29 That makes the Natural Rate of Unemployment a disingenuous concept; it merely rationalizes the inability of the labor market to provide jobs for everyone. 30 It does not allow for the possibility that new institutions and policies could be created to achieve real full employment; it is a natural phenomenon inherent to the economy. Moreover, the Federal Reserve arbitrarily increases the natural rate in times of high unemployment and lowers it when times are good (Figure 11.3). It was as high as 6.2% and as low as 4.7%. Inexplicably, the official unemployment rate has been below the natural rate since March 2017. In May 2018 the official unemployment rate (3.8%) was 0.9% below the supposed Natural Rate of Unemployment of 4.7%

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  The Natural Rate of Unemployment in Recent Years The underlying economic, social, and political factors that determine the Natural Rate of Unemployment can change over time, which means that the Natural Rate of Unemployment can change over time, too. Estimates by economists of the Natural Rate of Unemployment in the U.S. economy in the early 2000s run at about 4.5 to 5.5%. This is a lower estimate than earlier. We outline three of the common reasons that economists propose for this change below. 1. The internet has provided a remarkable new tool through which job seekers can find out about jobs at different companies and can make contact with relative ease. An internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, and requesting a list of jobs and application forms. Social networking sites such as LinkedIn have changed how people find work as well. 2. The growth of the temporary worker industry has probably helped to reduce the Natural Rate of Unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies. By the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping- stone to a permanent job that they might not have heard about or obtained any other way, so the growth of temp jobs will also tend to reduce frictional unemployment. 3. The aging of the “baby boom generation”—the especially large generation of Americans born between 1946 and 1964—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today.

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  Principles of Macroeconomics for AP® Courses 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  The Natural Rate of Unemployment in Recent Years The underlying economic, social, and political factors that determine the Natural Rate of Unemployment can change over time, which means that the Natural Rate of Unemployment can change over time, too. Estimates by economists of the Natural Rate of Unemployment in the U.S. economy in the early 2000s run at about 4.5 to 5.5%. This is a lower estimate than earlier. We outline three of the common reasons that economists propose for this change below. 1. The internet has provided a remarkable new tool through which job seekers can find out about jobs at different companies and can make contact with relative ease. An internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, and requesting a list of jobs and application forms. Social networking sites such as LinkedIn have changed how people find work as well. 2. The growth of the temporary worker industry has probably helped to reduce the Natural Rate of Unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies. By the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping-stone to a permanent job that they might not have heard about or obtained any other way, so the growth of temp jobs will also tend to reduce frictional unemployment. 3. The aging of the “baby boom generation”—the especially large generation of Americans born between 1946 and 1964—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today.

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  Principles of Economics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  economy is growing strongly, the unemployment rate only rarely dips as low as 4%. Moreover, the discussion earlier in this chapter pointed out that unemployment rates in many European countries like Italy, France, and Germany have often been remarkably high at various times in the last few decades. Why does some level of unemployment persist even when economies are growing strongly? Why are unemployment rates continually higher in certain economies, through good economic years and bad? Economists have a term to describe the remaining level of unemployment that occurs even when the economy is healthy: they call it the Natural Rate of Unemployment. The Long Run: The Natural Rate of Unemployment The Natural Rate of Unemployment is not “natural” in the sense that water freezes at 32 degrees Fahrenheit or boils at 212 degrees Fahrenheit. It is not a physical and unchanging law of nature. Instead, it is only the “natural” rate because it is the unemployment rate that would result from the combination of economic, social, and political factors that exist at a time—assuming the economy was neither booming nor in recession. These forces include the usual pattern of companies expanding and contracting their workforces in a dynamic economy, social and economic forces that affect the labor market, or public policies that affect either the eagerness of people to work or the willingness of businesses to hire. Let’s discuss these factors in more detail. 514 Chapter 21 | Unemployment This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 Frictional Unemployment In a market economy, some companies are always going broke for a variety of reasons: old technology; poor management; good management that happened to make bad decisions; shifts in tastes of consumers so that less of the firm’s product is desired; a large customer who went broke; or tough domestic or foreign competitors.

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  Principles of Macroeconomics

  • Steven A. Greenlaw, Timothy Taylor(Authors)
  • 2014(Publication Date)
  • Openstax

    (Publisher)

  The Natural Rate of Unemployment in Recent Years The underlying economic, social, and political factors that determine the Natural Rate of Unemployment can change over time, which means that the Natural Rate of Unemployment can change over time, too. Estimates by economists of the Natural Rate of Unemployment in the U.S. economy in the early 2000s run at about 4.5 to 5.5%. This is a lower estimate than earlier. Three of the common reasons proposed by economists for this change are outlined below. 1. The Internet has provided a remarkable new tool through which job seekers can find out about jobs at different companies and can make contact with relative ease. An Internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, requesting a list of jobs and application forms, and so on. Social networking sites such as LinkedIn have changed how people find work as well. 2. The growth of the temporary worker industry has probably helped to reduce the Natural Rate of Unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies; by the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping-stone to a permanent job that they might not have heard about or gotten any other way, so the growth of temp jobs will also tend to reduce frictional unemployment. 3. The aging of the “baby boom generation”—the especially large generation of Americans born between 1946 and 1963—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today.

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  eBook - ePub

  The Macroeconomic Environment of Business

  Core Concepts and Curious Connections

  • Maurice D Levi(Author)
  • 2014(Publication Date)
  • WSPC

    (Publisher)

  N and inflation of 8%.

  The Natural Rate of Unemployment is the hypothetical rate at which the demand for labor equals the supply of labor.

  Let us next suppose that after wages have been contracted at w, based on inflationary anticipations of 8%, inflation turns out to be less than had been expected, being only 5%. With the lower inflation the future price level ends up below of what had been anticipated.After the lower than anticipated price level becomes recognized by workers and firms, the relevant, actual supply and demand for labor curves become S1 and D1 in part (a) of Fig. 5.8 . If wages could fall to the new equilibrium, w1 , where S1 = D1 , unemployment would remain at UN . That is, if wages could be instantaneously revised to reflect actual inflation, unemployment would remain at the natural rate. However, in reality wages cannot easily be renegotiated to reflect actual inflation, especially when this means a wage reduction. Even though such a renegotiation of wages would mean jobs instead of unemployment for some workers, cuts in wages are usually resisted, not least in case this is seen as a sign of weakness in future wage negotiations. This is especially so when wages are negotiated by trade unions.8 The difficulty of reducing wages to a new, lower equilibrium level than was anticipated is generally stated in terms of wages being “rigid” or “sticky” in a downward-direction.

  When the equilibrium wage is lower than the actual contracted wage it is difficult to renegotiate lower wages. Wages are, therefore, said to be “rigid” or “sticky” in a downward-direction.

  If wages are rigid downwards, unemployment occurs when actual inflation turns out to be lower than had been anticipated. This is shown in Fig. 5.8(a) . Specifically, with wages stuck at w when inflation is 5% instead of the expected 8%, and with the relevant supply and demand curves for labor becoming S1 and D1 , unemployment is above the natural rate by the distance between S1 and D1 at wage, w. That is, unemployment is beyond the natural rate by (NS − ND ) in Fig. 5.8

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  eBook - ePub

  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  CHAPTER 7

  Full-Employment Output and the Natural Rate of Unemployment

  The study of real output in the economy requires the analysis of the labor market and the aggregate supply of commodities for the economy. The main variables of interest in this analysis are the long-run levels of employment and output, and the Natural Rate of Unemployment. Their derivation is distinct from that of the short-run behavior of the economy (covered in Chapter 8 ) and of the disequilibrium behavior of the economy (covered in Chapter 9 ).

  The long-run behavior of the economy, captured under the notions of the full-employment level of output and the Natural Rate of Unemployment, is presented in this chapter.

     

  The counterpart of the aggregate demand for commodities is their aggregate supply. This chapter presents the derivation of the long-run (LR) equilibrium levels of employment and output. This expression is usually shortened to the ‘long-run levels’, thereby dropping the word ‘equilibrium’ but implying it nevertheless. The LR aggregate output in the economy is also known as the full-employment output.

  As Chapter 1 explained, the full-employment output in macroeconomics is to be interpreted as the optimal output that can be produced on a sustainable basis over long periods from the efficient use of the economy's available factors of production and its available technology — given the economy's organizational and market structures,1 the wishes of the owners of the factors of production,2 as well as its economic, social, and political structures. This full-employment output is often more loosely referred to as the ‘potential long-run output’ that can be maintained with the economy's current resources and structures. In more formal terms, the full-employment level of output is defined as the long-run equilibrium level of output, where the term ‘long run’ refers to that analytical period when there are no rigidities, adjustment costs or expectational errors.

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  Rethinking Expectations

  The Way Forward for Macroeconomics

  • Roman Frydman, Edmund S. Phelps, Roman Frydman, Edmund S. Phelps, Roman Frydman, Edmund Phelps(Authors)
  • 2013(Publication Date)
  • Princeton University Press

    (Publisher)

  2 Simi- larly, when the value of a vacancy increases, firms respond by posting more vacancies, which lowers equilibrium unemployment in a search model of the labor market. In both cases firms are investing in the employment of new The author thanks Olafur G. Halldorsson for research assistance. 1. See also Phelps (1972) on the effect of monetary and fiscal policy on the natural rate. 2. This may cause output to fall initially as workers are diverted from production to the training of new employees. 302 . Gylfi Zoega workers because of an increase in the expected future profits from employing a worker. 9.2 A Moving Natural Rate of Unemployment Initial attempts to explain persistently high unemployment in the 1980s were founded on the idea that a transitory recession could leave permanent scars in the labor market—there was hysteresis in the labor market (see Lindbeck and Snower 1989; Layard et al. 1991). However, as the period of high unemployment turned from years to decades, this explanation lost credence. Theories that explained changes in the labor market equilibrium not related to the past performance of this market turned out to be more convincing, and they could potentially explain infrequent shifts in mean unemployment. 3 There are basically two variants of the theory, one based on flow models and the other on stock models. Phelps (1994), Blanchard (1997), and Nickell et al. (2005) provide good examples of the stock approach, whereas Mortensen and Pissarides (1994) and Pissarides (2000) are good examples of the flow approach. A distinction can also be made between models in which changes in equi- librium unemployment are caused by changing macroeconomic factors and those in which changes in the equilibrium are brought about by changing labor market institutions.

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  The Structural Foundations of Monetary Policy

  • Michael D. Bordo, John H. Cochrane, Amit Seru, Michael D. Bordo, John H. Cochrane, Amit Seru(Authors)
  • 2018(Publication Date)
  • Hoover Institution Press

    (Publisher)

  The first equilibrium rate concept is a purely short-run equilibrium. It is often referred to as the natural rate and is well formulated in New Keynesian dynamic stochastic general equilibrium (DSGE) models, where it corresponds to the value of the real interest rate that would be realized if prices are flexible (Neiss and Nelson 2003; Woodford 2003). This short-run equilibrium is influenced by temporary shocks other than monetary policy shocks. Estimates of this natural rate often exhibit greater variability than actual real interest rates, which are influenced by the presence of price rigidities. Some recent contributions have recommended that the central bank set policy rates in a way that drives the actual real interest rate to the value of this short-run natural rate (Barsky, Justiniano, and Melosi 2014; Curdia et al. 2015). Clearly, such a policy is highly model and shock dependent. It is not robust to model uncertainty but rather sensitive to the respective model specification.

  Laubach and Williams (2003) introduced another equilibrium rate concept that has received much attention. This concept is of a medium-run nature. Its derivation is based on a mixture of atheoretical time-series methods and a simple Keynesian-style model consisting of an aggregate demand relationship and a Phillips curve relationship. The equilibrium rate is modeled as the function of potential growth and some preference parameters, similar to a fully specified general equilibrium model without imposing the cross-equation restrictions of such models. Equilibrium rate, potential GDP growth, and preference parameters are unobserved variables. How much they move depends on technical parameters of the unobserved components time-series specification. More recently, Laubach and Williams (2016) and Holston, Laubach, and Williams (2017) have provided updated estimates indicating a sharp decline toward values around 0 percent for the United States and lower values in the euro area. These estimates have had a substantial impact on policy making. Yet they are characterized by a large degree of imprecision, instability, and potential estimation bias (GCEE 2015; Taylor and Wieland 2016; Beyer and Wieland 2017).

  A third concept is the long-run equilibrium rate or steady-state interest rate. The New Keynesian DSGE models that can be used to derive a short-run natural rate also include a long-run equilibrium rate or steady-state rate to which the short-run rate converges over time. This long-run equilibrium rate is a function of steady-state growth (per capita) and household rates of time preference and elasticity of substitution. Since the effects of price rigidities are temporary, the long-run equilibrium rate in New Keynesian DSGE models is equivalent to the equilibrium rate in a model of real economic growth (see, for example, Christiano, Eichenbaum, and Evans 2005; Smets and Wouters 2007).

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