Extract from our "A Higher US ‘NAIRU’?" research paper, published 12th July 2021
Could the US’ NAIRU (nonaccelerating inflation rate of unemployment), or the steady-state level of unemployment that is accompanied by stable inflation, rise in the aftermath of the Pandemic shock?
1. The NAIRU is not fixed number; the US’ NAIRU has varied over time: rising during the 1960s and the 1970s and falling since 1980. There are many factors that may influence NAIRU.
2. The US labour market may also experience hysteresis, which is the idea that the labour market does not revert to the prior state when the shock (either positive or negative) fades, i.e., a temporary shock may have lasting consequences. The question here is whether the Pandemic shock of 2020 was sufficiently severe to alter the dynamics of the US labour market.
3. In the nascent stage of the current economic recovery, there is scant data on which to robustly test various hypotheses, but our hunch is that the US’ NAIRU is likely to be higher in the short-term. Longer-term (3-5 years and beyond), the outlook is more ambiguous. But even then, our guess is that the structural factors might not be as powerful in pushing the NAIRU lower as they have been in the past. In sum, it is quite likely that we have seen the structural low point in the US’ NAIRU.
4. For years prior to 2020, the Fed had been surprised by how low the unemployment rate could go without triggering wage or price inflationary pressures. The prospect of the NAIRU rising would obviously have significant implications for the Fed and other central banks, if the ‘kink’ in the US’ Phillips Curve is somehow pushed higher by the Pandemic.
Sections included within this report are:
- A shifting NAIRU
- Factors driving the NAIRU
- Demographic changes alter the weights of the age cohorts with different levels of natural URs
- The New Economy enhances the productivity of workers and companies, dulling the cost-push inflationary process
- Trade globalisation raises price competitiveness and reduces companies’ pricing power
- Workers may have their own views of the wages they deserve, different from their productivities
- The labour market is complex, making the efficiency of job matching very important
- Government policies may also distort the labour market dynamics
- The Pandemic shock of 2020 and hysteresis in the labour market
- The shifting Beveridge Curve
- Implications for Fed policies
- Bottom line
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