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The Active Role of the Natural Rate of Unemployment

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  • Robert E. Hall
  • Marianna Kudlyak

Abstract

We propose that the natural rate of unemployment may have an active role in the business cycle, in contrast to a widespread view that the rate is fairly smooth and at most only weakly cyclical. We demonstrate that the tendency to treat the natural rate as near-constant would explain the surprisingly low slope of the Phillips curve. We observe that evidence is weak about this basic point–the evidence neither comes close to rejecting the conventional view nor does it reject a very different view in which fluctuations in the natural rate are associated with a substantial fraction of cyclical volatility. We show that the natural rate may have closely tracked the actual rate during the long recovery that began in 2009 and ended in 2019. We explain how the common finding of research in the Phillips-curve framework of low–often extremely low–response of inflation to unemployment could be the result of fairly close tracking of the natural rate and the actual rate in recoveries. Our interpretation of the data contrasts to that of many Phillips-curve studies, that conclude that inflation has little relation to unemployment.

Suggested Citation

  • Robert E. Hall & Marianna Kudlyak, 2025. "The Active Role of the Natural Rate of Unemployment," Working Paper Series 2023-33, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:97316
    DOI: 10.24148/wp2023-33
    Note: Original title: The Active Role of the Natural Rate of Unemployment during Cyclical Recoveries. Original publication date: 2023/11/29. Kudlyak presented some material from this paper as a part of her Alejandro Justiniano memorial keynote address at the annual Federal Reserve System Macroeconomics meeting, November 9 and 10, 2021.
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    References listed on IDEAS

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    1. Michael Dotsey & Shigeru Fujita & Tom Stark, 2018. "Do Phillips Curves Conditionally Help to Forecast Inflation?," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 43-92, September.
    2. Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2020. "Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?," Research in Economics, Elsevier, vol. 74(1), pages 26-62.
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    Cited by:

    1. Jonathan Garita-Garita, 2025. "Estimación de la tasa natural de desempleo para Costa Rica," Ensayos de Política Económica 2503, Banco Central de Costa Rica.

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    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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