Working Paper: NBER ID: w25930
Authors: Richard K. Crump; Stefano Eusepi; Marc Giannoni; Ayegl Ahin
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.
Keywords: Natural Rate of Unemployment; Labor Market Flows; Phillips Curve; Inflation Dynamics
JEL Codes: D84; E24; E31; E32; J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflow rate (F21) | natural rate of unemployment (J64) |
| increased labor force attachment of women (J21) | inflow rate (F21) |
| demographic shift from younger to older workers (J26) | inflow rate (F21) |
| aging of firms (L26) | inflow rate (F21) |
| inflow rate (F21) | unemployment rate (J64) |
| expected future unemployment gaps (J64) | inflation dynamics (E31) |