What we know and do not know about the natural rate of unemployment

58 Pages·1996·1.1 MB·English

by  Blanchard, Olivier (Olivier J.)

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working paper
department
of economics
What WeKnowandDoNotKnowabout
theNaturalRateofUnemployment
OlivierBlanchard* Uatorence-F. feV^.
October, 1996
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139

What WeKnowandDoNotKnowabout
theNaturalRateofUnemployment
OlivierBlanchard* Uu>n5f>ce-P, feh.
96-29 October, 1996
STITUTE
What We Know and Do Not Know About the Natural Rate of
Unemployment
Olivier Blanchard Lawrence E Katz *
• Department ofEconomics, MIT, Cambridge, MA, 02138 (blanchar@ mit.edu), and Depart-
mentofEconomics, Harvard University, Cambridge, MA, 02139 ([email protected].) This
paper was written for the Journal of Economic Perspectives. We thank Marianne Bertrand for
superb research assistance and David Card forprovidinguswith earningsdata bystate from the
March CurrentPopulation Surveys. Wearegrateful toCharlie Bean, David Blanchflower, David
Card, PeterDiamond, Brad DeLong, Richard Freeman,JuanJimeno, Alan Kruegen Richard La-
yard, Greg Mankiw, Steve Nickell, Andrew Oswald, Edmund Phelps, Qlles Saint-Paul, Robert
Solow, and TimothyTaylor forcomments.
Natural rate
Abstract
CX^er the past three decades, alarge amountofresearch hasattempted to identify
the determinants ofthe natural rate ofunemployment. It is thisbody ofwork we
assess in this paper. We reach two mainconclusions. First, there hasbeen consid-
erable theoretical progress over the past 30 years. A framework has emerged. We
present it, and show how it can be used to think for example about the relation
between technologicalprogressand unemployment. Second, empirical knowledge
lagsbehind. Economistsdo not have agoodquantitative understandingofthe de-
We
terminants ofthe riatural rate, either across time or across countries. look at
two issues, the relation ofwages to unemployment, and the rise ofEuropean un-
employment.