A Rising Natural Rate of Unemployment: Transitory or Permanent?

Abstract

ABSTRACT The U.S. unemployment rate has remained stubbornly high since the 2007-2009 recession leading many to conclude that structural, rather than cyclical, factors are to blame. Relying on a standard job search and matching framework and empirical evidence from a wide array of labor market indicators, we examine whether the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. Our analyses suggest that the natural rate has risen over the past several years, with our preferred estimate implying an increase from its pre-recession level of close to a percentage point. An assessment of the underlying factors responsible for this increase, including labor market mismatch, extended unemployment benefits, and uncertainty about overall economic conditions, implies that only a small fraction of this increase is likely to be persistent. Keywords: equilibrium unemployment, Beveridge curve, structural unemployment, mismatch JEL codes: E24, J3, J6. *Corresponding author (email: mary.daly@sf.frb.org). Daly, Hobijn, and Valletta are at the Federal Reserve Bank of San Francisco; Sahin is with the Federal Reserve Bank of New York. The authors are grateful to Glenn Rudebusch and John Williams for their suggestions and comments. The views expressed in this paper are solely those of the authors and are not attributable to the Federal Reserve Banks of New York and San Francisco or the Federal Reserve System. This version covers data through August 20