The different measures of the natural rate of unemployment
In this paper, Bok et al. discuss the concept of natural rates of unemployment and their implications for policymakers. The main conclusions drawn from the paper:
- Pre-Pandemic vs. Post-Pandemic Unemployment Rates: Before the pandemic, the U.S. unemployment rate was at a historic low close to its underlying longer-run value. Post-pandemic, despite returning to pre-pandemic levels, the short-run noninflationary rate of unemployment increased substantially, reaching as high as 6%.
- Natural Rate Benchmarks: Policymakers use two benchmarks to assess appropriate monetary policy: the longer-run unemployment rate and the noninflationary rate of unemployment. These benchmarks help evaluate normal economic activity in the longer run and assess inflationary pressures in the short and medium run.
- Estimation Approaches:
Longer-Run Unemployment Rate: This approach relies on changes in the labor force composition, while statistical methods and ground-up approaches are also employed to estimate trends for different demographic groups. Noninflationary Rate of Unemployment: The Phillips curve is commonly used to estimate this benchmark rate by modeling the relationship between inflation and deviations in unemployment from its noninflationary level. State-space models are utilized to determine this rate while considering various factors affecting inflationary pressures. - Divergence in Benchmarks: The two benchmark rates can sometimes diverge significantly, providing context for policy decisions. For instance, recent data showed a notable gap between the noninflationary rate of unemployment and its longer-run level, prompting policy adjustments to address inflation concerns.
Estimating Natural Rates of Unemployment: A Primer
Authors: Brandyn Bok, Richard K. Crump, Christopher J. Nekarda, Nicolas Petrosky-Nadeau
From: Federal Reserve Bank of San Francisco, Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System
A declining natural rate
In this paper, Hall and Kudlyak study the cyclical recovery beginning in 2009 and ending in early 2020, during which inflation stayed close to the Fed’s target of two percent per year and the unemployment rate was close to the natural rate. The authors observed that unemployment started at an elevated level and glided downward until interrupted by the next recession or when unemployment hit bottom at around 3.5 percent. They conclude that the natural rate declined along fairly close to the same path.
We demonstrate that if the true natural rate is substantially positively correlated with the actual rate, Phillips curves estimated with a constant in place of the true natural rate will likely appear to be close to flat. The same conclusion follows if the Phillips curve estimation is based on a time series for the natural rate that is uncorrelated or only weakly correlated with the actual rate.
The Active Role of the Natural Rate of Unemployment During Cyclical Recoveries
Authors: Robert E. Hall, Marianna Kudlyak
From: Stanford University, Federal Reserve Bank of San Francisco
