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The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate

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  • Murat Tasci

    ()
    (Research Department, Federal Reserve Bank of Cleveland)

Abstract

This paper proposes an empirical method for estimating a long-run trend for the unemployment rate that is grounded in the modern theory of unemployment. I write down an unobserved components model and identify the cyclical and trend components of the underlying unemployment flows, which in turn imply a time varying estimate of the unemployment trend, the natural rate. I identify a sharp decline in the outflow rate - job finding rate- since 2000, which was partly offset by the secular decline in the inflow rate separation rate since 1980s, implying a relatively stable natural rate, currently at 6 percent. Numerical examples show that slower labor reallocation along with the weak output growth explains most of the persistence in unemployment since the Great Recession. Contrary to the business-cycle movements of the unemployment rate, a significant fraction of the low-frequency variation can be accounted for by changes in the trend of the inflows, especially prior to 1985. Finally, I highlight several desirable features of this natural rate concept that makes it a better measure than traditional counterparts. These include statistical precision, the significance of required revisions to past estimates with subsequent data additions, policy relevance and its tight link with the theory.

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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1233.

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Length: 47 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:koc:wpaper:1233

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Keywords: Unemployment; Natural Rate; Unemployment Flows; Labor Market Search;

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  1. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  2. Regis Barnichon & Christopher J. Nekarda, 2012. "The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(2 (Fall)), pages 83-131.
  3. Jesse Rothstein, 2012. "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations," NBER Working Papers 17966, National Bureau of Economic Research, Inc.
  4. Hertweck, Matthias Sebastian & Sigrist, Oliver, 2013. "The Aggregate Effects of the Hartz Reforms in Germany," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79942, Verein für Socialpolitik / German Economic Association.
  5. Richard Rogerson, 1997. "Theory Ahead of Language in the Economics of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 73-92, Winter.
  6. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
  7. 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.
  8. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  9. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  10. 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.
  11. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
  12. Regis Barnichon & Andrew Figura, 2010. "What drives movements in the unemployment rate? a decomposition of the Beveridge curve," Finance and Economics Discussion Series 2010-48, Board of Governors of the Federal Reserve System (U.S.).
  13. Mary Daly & Bart Hobijn, 2010. "Okun’s law and the unemployment surprise of 2009," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar8.
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Cited by:
  1. Christopher L. Foote & Richard W. Ryan, 2012. "Labor-market polarization over the business cycle," Public Policy Discussion Paper 12-8, Federal Reserve Bank of Boston.
  2. Gonul Sengul & Murat Tasci, 2014. "Unemployment Flows, Participation and the Natural Rate for Turkey," Koç University-TUSIAD Economic Research Forum Working Papers 1404, Koc University-TUSIAD Economic Research Forum.
  3. Mark E Schweitzer & Murat Tasci, 2013. "What constitutes substantial employment gains in today’s labor market?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jun.

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