A Dismal Labor MarketPosted: September 28, 2009 Filed under: The Great Recession | Tags: NAIRU, natural rate of unemployment, Phelps, unemployment 4 Comments
I started the big lecture in macroeconomics on unemployment with a very out of date textbook. It isn’t even that old in terms of textbook cycles. It’s just the world economy has changed; really changed. The last unemployment data I was looking at came from 2007 and a world of hurt and CHANGE (TM) stands between that year and today.
One of my students noticed that the overall pattern of unemployment (and you can see it in the FRED graph above) showed a drift up of the central tendency or mean from a lower looking central tendency in the 1950s and 1960s to a higher one in the 1970s and 1980s. I did the happy dance because I really like it when students actually notice these things. It makes my life a lot easier when I don’t have to point every little thing like that out. The deal is if you look around the 1990s it seems to drift a little downwards again before that last gray bar representing this last recession dated by the NBER. That would be our current Great Recession. Notice how the downward drift in the series could potentially have stopped and it appears there could be a slight updrift? Again, that’s in the central tendency or what you might call the mean, the median, or the mode depending on how you want to measure the statistic.
That momentum and drift around that central tendency in the unemployment series represents flows above and around what we call the Natural Rate of Unemployment. People used to set up all kinds of policy goals after the Great Depression to get to a zero unemployment rate. Actually, they did it with the Humphrey Hawkins Full Employment bill in the 1970s too because the wish was to get every one unemployed into a job. We’ve learned quite a bit more about what is and isn’t possible now.
In the 1960s, Milton Friedman and Edmund Phelps begun to study the unemployment rate carefully to see if there was any structural or natural rate of unemployment that was related to what was going on with an economy and more important, if the goal of 0% unemployment was ever going to be more than a great wish. They also wanted to study the relationship between inflation and unemployment. Well, it turns out that there is a hypothetical rate of unemployment associated with certain things going on in the economy, like inflation, recession, or a slow economic recovery. This natural rate corresponds to the best case scenario given the set of circumstances going on in the larger economy and we’ve found that the level can go up or down, depending on that set of circumstances.