2012 ARisingNaturalRateOfUnemployment
- (Daly, Robijn et al., 2012) ⇒ Mary Daly, Bart Hobijn, Aysegul Sahin, and Robert Valletta. (2012). A Rising Natural Rate of Unemployment: Transitory or Permanent?. In: Journal of Economic Perspectives, 26(12).
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equilibrium unemployment, Beveridge curve, structural unemployment, mismatch JEL codes: E24, J3, J6.
Abstract
The U.S. unemployment rate has remained stubbornly high since the 2007-2009 recession leading many to conclude that structural, rather than cyclical, factors are to blame. Relying on a standard job search and matching framework and empirical evidence from a wide array of labor market indicators, we examine whether the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. Our analyses suggest that the natural rate has risen over the past several years, with our preferred estimate implying an increase from its pre-recession level of close to a percentage point. An assessment of the underlying factors responsible for this increase, including labor market mismatch, extended unemployment benefits, and uncertainty about overall economic conditions, implies that only a small fraction of this increase is likely to be persistent.
2. Equilibrium unemployment and the natural rate
The increase in the U.S. unemployment rate associated with the 2007-2009 recession is unprecedented during the postwar era. The unemployment rate rose by 5.7 percentage points from a low of 4.4 percent in late 2006 and early 2007 to 10.1 percent in October 2009; this exceeds the net increase of 5.2 percentage points between mid-1979 and late 1982 (which spans two recessionary episodes). Moreover, two years into the recovery (as of the third quarter of 2011), the unemployment rate has declined by only about 1 percentage point.
This pattern of persistently elevated unemployment raises the possibility that in addition to the usual cyclical increase, an elevated structural component and corresponding higher natural rate may be may be contributing as well. As defined in Brauer (2007), the natural rate of unemployment “arises from all sources other than fluctuations in demand associated with business cycles. The rate of turnover in particular jobs, and how quickly unemployed workers are matched with vacant positions. Those factors in turn depend on the characteristics of jobs and of workers and on the efficiency of the labor market’s matching process.” Given the severe shock to labor markets, it is reasonable to ask whether some of these noncyclical factors have been altered in a way that increases the natural rate of unemployment in either the short or the long term.
2.1 Frictional unemployment in equilibrium
To assess the factors affecting the unemployment rate in the short run as well as its longer run level, we rely on the model of equilibrium frictional unemployment from Pissarides (2000, Chapter 1). This model specifies two curves that determine equilibrium frictional unemployment: the Beveridge Curve (BC) and the Job Creation curve (JCC). We use this framework to analyze the potential increase in the natural rate of unemployment, focusing here on a nontechnical discussion of the model’s key elements.
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