{
  "id": "RL32274",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "RL32274",
  "active": false,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 316642,
      "date": "2006-07-10",
      "retrieved": "2016-04-07T18:57:34.923029",
      "title": "A Changing Natural Rate of Unemployment: Policy Issues",
      "summary": "A concept that is fundamental to understanding the economy is that there is an equilibrium,\nmarket-clearing rate of unemployment determined by labor market characteristics, policy, and\nconditions. This rate of unemployment is referred to as the \"natural rate\" or \"full employment rate\"\nof unemployment or the NAIRU (non-accelerating inflation rate of unemployment). Although\nexpansionary fiscal or monetary policy might be able to temporarily push unemployment below the\nnatural rate in exchange for higher inflation, eventually actual unemployment would rise back to the\nnatural rate without inflation falling. This concept is consistent with the view that monetary policy\nhas no long-run effect on real variables such as economic growth or unemployment, and affects only\nprices in the long run. If unemployment did not return to a natural rate, it would imply that monetary\npolicy could permanently affect unemployment.\n There are periods of U.S. history when a constant natural rate concept cannot explain the\nbehavior of unemployment and inflation. For example, in the 1970s, inflation rose although\nunemployment was above estimates of the natural rate, and in the 1990s, inflation fell although\nunemployment was below estimates of the natural rate. A more sophisticated theory is needed to\nexplain these periods. Since the natural rate is determined by the characteristics of the labor market,\nit is possible that changes in the labor market lead to changes in the natural rate over time. For\nexample, an aging workforce, unexpectedly rapid productivity growth, policy changes, and a growing\ntemporary workforce are some of the factors that could have led to a decline in the natural rate in the\n1990s. In this view, at any given moment, there is some natural rate of unemployment, below\n(above) which inflation will rise (fall), but that rate may be different from the natural rate in the past\nor future because of labor market changes. It is estimated that the natural rate rose during the 1970s\nand 1980s, and fell back to earlier levels in the 1990s.\n Although there is no theoretical drawback to the concept of a changing natural rate, economists\nhave been unsuccessful in empirically predicting when changes would take place. This leaves the\ntheory open to the criticism that, rather than offering a meaningful explanation of the empirical\nrecord, it does little more than offer post hoc rationalization for contradictory results. Any natural\nrate estimate must be accompanied by a wide range of uncertainty -- some research suggests a natural\nrate of 5.9%, with a 95% confidence interval of 3.9% to 7.6%. Yet alternative theories to the natural\nrate have done a little better at explaining or predicting economic outcomes. The unpredictability\nof a changing natural rate suggests that excessive weight should not be placed on the gap between\nactual unemployment and natural rate estimates in fiscal and monetary policy decisions. The natural\nrate is probably most useful to policymakers as one of many economic indicators that can predict\nchanges in inflation or the business cycle. Although changes in the natural rate have not been\nsuccessfully predicted, it would be difficult to make systematic policy decisions without some notion\nof full employment.",
      "type": "CRS Report",
      "typeId": "REPORTS",
      "active": false,
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      "topics": []
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  "topics": [
    "Economic Policy"
  ]
}