The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate
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.
|Date of creation:||Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Rumelifeneri Yolu, Sarıyer, 34450 İstanbul|
Web page: http://erf.ku.edu.tr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Matthias S. Hertweck & Oliver Sigrist, 2013.
"The Aggregate Effects of the Hartz Reforms in Germany,"
2013/01, Faculty of Business and Economics - University of Basel.
- Matthias S. Hertweck & Oliver Sigrist, 2012. "The Aggregate Effects of the Hartz Reforms in Germany," Working Paper Series of the Department of Economics, University of Konstanz 2012-38, Department of Economics, University of Konstanz.
- Matthias S. Hertweck & Oliver Sigrist, 2013. "The Aggregate Effects of the Hartz Reforms in Germany," SOEPpapers on Multidisciplinary Panel Data Research 532, DIW Berlin, The German Socio-Economic Panel (SOEP).
- 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.
- 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.
- Regis Barnichon & Christopher J. Nekarda, 2013. "The ins and outs of forecasting unemployment: Using labor force flows to forecast the labor market," Finance and Economics Discussion Series 2013-19, Board of Governors of the Federal Reserve System (U.S.).
- Dale T. Mortensen & Christopher A. Pissarides, 1994.
"Job Creation and Job Destruction in the Theory of Unemployment,"
Review of Economic Studies,
Oxford University Press, vol. 61(3), pages 397-415.
- Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 19 pages.
- Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
- repec:sae:ilrrev:v:65:y:2012:i:3:p:437-500 is not listed on IDEAS
- Rothstein, Jesse, 2012.
"The Labor Market Four Years Into the Crisis: Assessing Structural Explanations,"
Institute for Research on Labor and Employment, Working Paper Series
qt2x576316, Institute of Industrial Relations, UC Berkeley.
- Jesse Rothstein, 2012. "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations," NBER Working Papers 17966, National Bureau of Economic Research, Inc.
- 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.
- Darby, Michael R & Haltiwanger, John C & Plant, Mark W, 1985.
"Unemployment Rate Dynamics and Persistent Unemployment under Rational Expectations,"
American Economic Review,
American Economic Association, vol. 75(4), pages 614-37, September.
- Michael R. Darby & John Haltiwanger & Mark Plant, 1984. "Unemployment-Rate Dynamics and Persistent Unemployment Under RAtional Expectations," UCLA Economics Working Papers 339, UCLA Department of Economics.
- 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.
- Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
- 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.
- Gordon, Robert J, 1996.
"The Time-varying NAIRU and its Implications for Economic Policy,"
CEPR Discussion Papers
1492, C.E.P.R. Discussion Papers.
- Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
- Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
- Mary C. Daly & Bart Hobijn, 2010. "Okun’s law and the unemployment surprise of 2009," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar8.
- 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.).
- 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.
- Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
- Peter K. Clark, 1987. "The Cyclical Component of U. S. Economic Activity," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 797-814.
When requesting a correction, please mention this item's handle: RePEc:koc:wpaper:1233. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sumru Oz)
If references are entirely missing, you can add them using this form.