The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate
AbstractThis 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 InfoPaper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1233.
Length: 47 pages
Date of creation: Nov 2012
Date of revision:
Unemployment; Natural Rate; Unemployment Flows; Labor Market Search;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-LAB-2012-12-06 (Labour Economics)
- NEP-MAC-2012-12-06 (Macroeconomics)
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