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

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  • Murat Tasci

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1017.

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Date of creation: 2010
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Handle: RePEc:fip:fedcwp:1017

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Keywords: Unemployment;

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  1. Steven Davis & R Jason Faberman & John Haltiwanger & Ron Jarmin & Javier Miranda, 2008. "Business Volatility, Job Destruction, and Unemployment," Working Papers, Center for Economic Studies, U.S. Census Bureau 08-26, Center for Economic Studies, U.S. Census Bureau.
  2. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 15-32, January.
  3. Michael R. Darby & John C. Haltiwanger & Mark W. Plant, 1986. "The Ins and Outs of Unemployment: The Ins Win," UCLA Economics Working Papers, UCLA Department of Economics 411, UCLA Department of Economics.
  4. Michael R. Darby & John C. Haltiwanger & Mark W. Plant, 1985. "Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations," NBER Working Papers 1558, National Bureau of Economic Research, Inc.
  5. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 1(1), pages 84-110, January.
  6. R. Jason Faberman, 2008. "Job flows, jobless recoveries, and the Great Moderation," Working Papers 08-11, Federal Reserve Bank of Philadelphia.
  7. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  8. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  9. Mary Daly & Bart Hobijn, 2010. "Okun’s law and the unemployment surprise of 2009," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar8.
  10. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 797-814, November.
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Cited by:
  1. Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 975-991.

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