1
$\begingroup$

Having an unemployment rate below the natural rate of unemployment (NRU) leads to wage inflation and a reduction in productivity. Seeing the consequences of that, and knowing that one of the roles of a central bank is to control unemployment and inflation, central banks must accurately determine what the unemployment is currently at and see whether it is above or below the NRU.

I ask this because after looking at the Bureau of Labor Statistics' data on U-3 and U-6 (seasonally-adjusted) between the years 2010 and 2020, the lowest U-3 got was 3.5% in 2019Q4, whereas U-6 was 6.5%. However, the NRU in 2019Q4 4.45%

So, what measurement is used by central banks and what would be the best way to measure unemployment so that it can best be compared to the NRU?

Improve this question
$\endgroup$

2 Answers 2

Reset to default
1
$\begingroup$

The phrase “natural rate of unemployment” has been largely replaced by NAIRU or similar concepts. Each country has its own definition of the unemployment rate, the U.S. “headline” measure is U-3.

Nobody has created an estimate for NAIRU that is based on a function of other variables, instead it is estimated based on the behaviour of the economy and the chosen unemployment rate measure. This implies that a NAIRU estimate is defined relative to the unemployment rate used in the estimation procedure. In the United States, most researchers would run their estimation versus U-3, but one might need to validate this.

Improve this answer
$\endgroup$
5
  • $\begingroup$ On the wikipedia, it says that estimates for the NAIRU in the U.S. to be around 4-6%. If comparisons are usually done with U-3, what, if anything, did the Federal Reserve do to keep unemployment at the NAIRU? $\endgroup$
    – MrMineHeads
    Commented Jul 31, 2020 at 1:59
  • $\begingroup$ If one follows actual Fed deliberations, there is massive uncertainty about the level of NAIRU. As for what the Fed does, they have a policy announcement every six weeks describing their policy actions. Historically, they raised or lowered the target for the Fed Funds rate, in 2020, what they are doing changes at a rapid pace. $\endgroup$
    – Brian Romanchuk
    Commented Jul 31, 2020 at 2:05
  • $\begingroup$ I would note that many people - including myself - argue that the NAIRU (or equivalent) do not exist. This is consistent with the extremely poor track record of NAIRU-based policy analysis since the 1990s. $\endgroup$
    – Brian Romanchuk
    Commented Jul 31, 2020 at 2:07
  • $\begingroup$ Oh, why would that be? Any resources where I can read more about that? I am trying to get into some basic macroeconomic theory. $\endgroup$
    – MrMineHeads
    Commented Jul 31, 2020 at 2:08
  • $\begingroup$ The text “Full Employment Abandoned” by William (Bill) Mitchell and Joan Muysken has a long explanation of the evolution and flaws of the natural rate of unemployment belief. It’s an academic text, and not cheap. Bill Mitchell has a blog where he probably covers most of the material in smaller chunks. $\endgroup$
    – Brian Romanchuk
    Commented Jul 31, 2020 at 2:14
0
$\begingroup$

Natural level of unemployment is always estimated using some econometric model. When you want to compare NRU to some observed unemployment you should use the same statistic that was used to derive the NRU to avoid comparing apples to oranges.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.