Monday, October 10, 2011

natural rate of unemployment

The concept of NAIRU* is one of suspect theoretical validity, I think, in part because we don't really have a great comprehensive model of unemployment and inflation; that said, it often seems to have ontological value, insofar as high-frequency changes in the unemployment rate seem to lead high-frequency accelerations in nominal wages, suggesting a possibly changing unemployment rate above which wage inflation decelerates and below which it accelerates. One of the concerns with the length of the recent employment recession, and in particular with the number of people who have been unemployed for a long time, is that these people lose skills (in various senses of that concept), suggesting perhaps that these phenomena will lead to rising NAIRU. It seems to me that, particularly framed as I have done so, this might be a testable question: is the low-frequency component of nominal wage acceleration, with the high-frequency relationship to unemployment backed out, predicted by any combination of previous unemployment rates and previous rates of long-term unemployment?

*Non-Accelerating Inflation Rate of Unemployment.

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