Working Paper

The quest for the natural rate: evidence from a measure of labor market turbulence

Abstract: The natural rate of unemployment changes over time as a result of structural shifts in the distribution of employment across sectors. This paper develops a Kalman filtering approach to measuring these structural shifts or turbulence. The technique is useful in distinguishing those changes in employment shares within an industry that are cyclical from those that are idiosyncratic. A measure of the business cycles is generated that is consistent with alternative measures of the cycle. A time--varying measure of the natural rate is constructed as the rate of unemployment that is consistent with the economy growing at its equilibrium rate, conditional on the level of labor market turbulence. The natural rate of unemployment increased over the seventies in response to increased dispersion in the labor market and has declined steadily since the late eighties. Results indicate that the gap between the actual and natural rates of unemployment enters negatively and significantly in inflation regressions. This result holds across a variety of specifications.

Keywords: Labor market; Unemployment;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 1998

Number: WP-98-10