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A Unified Approach to Measuring u

Author

Listed:
  • Richard K. Crump
  • Stefano Eusepi
  • Marc Giannoni
  • Ayşegül Şahin

Abstract

This paper bridges the gap between two popular approaches to estimating the natural rate of unemployment, u*. The first approach uses detailed labor market indicators such as labor market flows, cross-sectional data on unemployment and vacancies, or various measures of demographic changes. The second approach which comprises reduced form models and DSGE models relies on aggregate price and wage Phillips curve relationships. We combine the key features of these two approaches to estimate the natural rate of unemployment in the United States using both data on labor market flows and a forward-looking Phillips curve linking inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment is around 4.0% toward the end of 2018 and that the unemployment gap is roughly closed. Identification of a secular downward trend in the unemployment rate, driven solely by the inflow rate, facilitates the estimation of u*. We identify the increase in labor force attachment of women, decline in job destruction and reallocation intensity, and dual aging of workers and firms as the main drivers of the secular downward trend in the inflow rate.

Suggested Citation

  • Richard K. Crump & Stefano Eusepi & Marc Giannoni & Ayşegül Şahin, 2019. "A Unified Approach to Measuring u," NBER Working Papers 25930, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25930
    Note: AG EFG LS ME PR
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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