NCPA - National Center for Policy Analysis

The "Natural" Unemployment Rate Fell, Too

June 28, 1999

In the early 1990s, most economists put the so-called natural rate of unemployment in the U.S. at about 5.5 percent to 6 percent. If employment fell below that mark, it was said, the job market would become so tight that wages and inflation would surge. Yet the May 1999 unemployment rate was 4.2 percent, and the consumer price index rose a mere 1.6 percent in 1998.

Now economists are saying the natural unemployment rate varies from country to country and over time in the same country, due to government policies, business practices and worker attitudes. In a recent study, economists Lawrence Katz of Harvard University and Alan Krueger of Princeton University attempted to identify specific factors that may have reduced this natural unemployment rate since the late 1970s. They concluded:

  • Older workers change jobs less often; thus the aging U.S. workforce has reduced the natural unemployment rate by 0.4 percentage points.
  • The number of jobs filled by temporary-help agencies about quadrupled between 1980 and 1998, reducing the length of workers' unemployment and cutting the natural unemployment rate by 0.2 percentage points.
  • The number of prisoners -- mostly previously unemployed men -- also quadrupled, reducing the natural unemployment rate by 0.2 percentage points.
  • Thus the natural unemployment rate has fallen a full percentage point -- presumably to 4.5 percent to 5 percent.

The idea of a natural unemployment rate arose in an era when politicians clamored for low interest rates, easy money and deficit spending to produce "full employment." Those policies produced perverse results. However, hardly anyone has talked about full employment in the 1990s, while the Federal Reserve has concentrated on price stability, making it easier to expand employment without inflation -- whether natural or not.

Source: Robert J. Samuelson, "Our Lifetime Job Prospects," Newsweek, June 28, 1999.


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