The natural rate of unemployment
Policymakers have spent half a century in search of the natural rate of unemployment. The fifth in our series
WHY does unemployment exist? If there is a central question in macroeconomics, this is it. There are few bigger wastes than the loss to idleness of hours, days and years by people who would rather be working. Unemployment can ruin lives, sink budgets and topple governments. Yet policymakers do not wage all-out war on joblessness. Most, like the Federal Reserve, America’s central bank, target what is known as unemployment’s “natural” rate, at which inflation is stable.
The importance of this concept is hard to overstate. The Fed’s argument for its recent interest-rate rises, for example, hinges on stopping unemployment from falling too far beneath the natural rate. Yet the natural rate is in many respects an article of faith, always sought but never seen. Where does it come from?
This article appeared in the Schools brief section of the print edition under the headline “Central bankers’ holy grail”
From the August 26th 2017 edition
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