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The Recent Evolution of the Natural Rate of Unemployment

Author

Listed:
  • Daly, Mary C.

    (Federal Reserve Bank of San Francisco)

  • Hobijn, Bart

    (Federal Reserve Bank of Chicago)

  • Valletta, Robert G.

    (Federal Reserve Bank of San Francisco)

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.

Suggested Citation

  • Daly, Mary C. & Hobijn, Bart & Valletta, Robert G., 2011. "The Recent Evolution of the Natural Rate of Unemployment," IZA Discussion Papers 5832, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5832
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    Cited by:

    1. Chassamboulli, Andri, 2013. "Labor-market volatility in a matching model with worker heterogeneity and endogenous separations," Labour Economics, Elsevier, vol. 24(C), pages 217-229.
    2. Mary C. Daly & Bart Hobijn & Aysegül Sahin & Robert G. Valletta, 2012. "A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 3-26, Summer.
    3. Jinzhu Chen & Prakash Kannan & Prakash Loungani & Bharat Trehan, 2012. "New evidence on cyclical and structural sources of unemployment," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-23.
    4. Bart Hobijn & Aysegul Sahin, 2013. "Beveridge Curve Shifts across Countries since the Great Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 566-600, December.
    5. Mária Illés, 2016. "Enterprise Models in Terms of Sustainability," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 12(si), pages 55-67.
    6. Robert E. Hall & Sam Schulhofer-Wohl, 2018. "Measuring Job-Finding Rates and Matching Efficiency with Heterogeneous Job-Seekers," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 1-32, January.
    7. John Schmitt & Kris Warner, 2011. "Deconstructing Structural Unemployment," CEPR Reports and Issue Briefs 2011-06, Center for Economic and Policy Research (CEPR).
    8. Peter A. Diamond & Ayşegül Şahin, 2016. "Disaggregating the Matching Function," NBER Working Papers 22965, National Bureau of Economic Research, Inc.
    9. Hall, R.E., 2016. "Macroeconomics of Persistent Slumps," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2131-2181, Elsevier.
    10. Sam Schulhofer-Wohl & Robert Hall, 2014. "Measuring Matching Efficiency with Heterogeneous Jobseekers," 2014 Meeting Papers 368, Society for Economic Dynamics.
    11. Diamond, Peter A. & Şahin, Ayşegül, 2015. "Shifts in the Beveridge curve," Research in Economics, Elsevier, vol. 69(1), pages 18-25.
    12. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 143-213.
    13. repec:zbw:bofrdp:2015_002 is not listed on IDEAS
    14. Mária Illés, 2016. "Enterprise Models in Terms of Sustainability," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 12(02), pages 55-67.
    15. Hie Joo Ahn & Leland D. Crane, 2020. "Dynamic Beveridge Curve Accounting," Papers 2003.00033, arXiv.org.
    16. John Schmitt, 2011. "Labor Market Policy in the Great Recession: Some Lessons from Denmark and Germany," CEPR Reports and Issue Briefs 2011-12, Center for Economic and Policy Research (CEPR).
    17. Edward P. Lazear & James R. Spletzer, 2012. "The United States labor market: status quo or a new normal?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 405-451.
    18. Mary C. Daly & Bast Hobijn & Ayşeqül Şahin & Robert G. Valletta, 2012. "Rynki pracy w modelu poszukiwań i dopasowań: czy naturalna stopa bezrobocia rzeczywiście wzrosła?," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 11-12, pages 147-172.
    19. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
    20. Boele Bonthuis & Valerie Jarvis & Juuso Vanhala, 2016. "Shifts in euro area Beveridge curves and their determinants," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-17, December.
    21. Vanhala, Juuso & Bonthuis, Boele & Jarvis, Valerie, 2013. "What’s going on behind the euro area Beveridge curve(s)?," Working Paper Series 1586, European Central Bank.
    22. Vanags, Alf & Sonin, Konstantin & Anosova, Daria & Zasova, Anna, 2013. "Structural or Cyclical? Unemployment in Latvia Since the 2008-09 Financial Crisis," CEPR Discussion Papers 9525, C.E.P.R. Discussion Papers.
    23. Mary Daly & Bart Hobijn & Aysegul Sahin & Robert Valletta, 2011. "A Rising Natural Rate of Unemployment: Transitory or Permanent?," Tinbergen Institute Discussion Papers 11-160/3, Tinbergen Institute.

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    More about this item

    Keywords

    equilibrium unemployment; Beveridge curve; structural unemployment; mismatch;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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