The ins and outs of unemployment in the long run: a new estimate for the natural rate?

Murat Tasci

No 1017, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: In this paper, we present a simple, reduced form model of comovements in real activity and unemployment flows and use it to uncover the trend changes in these flows, which determine the trend in the unemployment rate. We argue that this trend rate has several key features that are reminiscent of a ?natural rate.? We show that the natural rate, measured this way, has been relatively stable in the last decade, even after the last recession hit the U.S. economy. This relatively muted change was due to two opposing trend changes: On one hand, the trend in the job-finding rate, after being relatively stable for decades, declined by a significant margin in the last decade, pushing trend unemployment up. On the other hand, the separation rate has somewhat offset this effect with a continued secular decline since the early 1980s. We also show that, contrary to business-cycle frequency movements, most of the low-frequency variation in the unemployment rate could be accounted for by changes in the trend of separation rates, not job-finding rates. The notable exception is the last decade, when clear trend changes in both flows imply opposing effects on the trend unemployment rate and slower worker reallocation in the U.S. economy.

Keywords: Unemployment (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-lab
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Citations: View citations in EconPapers (2)

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