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Journal of Economic Perspectives: Vol. 26 No. 3 (Summer 2012)

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A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?

Article Citation

Daly, Mary C., Bart Hobijn, Ayşegül Şahin, and Robert G. Valletta. 2012. "A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?." Journal of Economic Perspectives, 26(3): 3-26.

DOI: 10.1257/jep.26.3.3

Abstract

The U.S. unemployment rate has remained stubbornly high since the 2007-2009 recession, leading some observers to conclude that structural rather than cyclical factors are to blame. Relying on a standard job search and matching framework and empirical evidence from a wide array of labor market indicators, we examine whether the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. Our preferred estimate indicates an increase in the natural rate of unemployment of about one percentage point during the recession and its immediate aftermath, putting the current natural rate at around 6 percent. An assessment of the underlying factors responsible for this increase, including labor market mismatch, extended unemployment benefits, and uncertainty about overall economic conditions, implies that only a small fraction is likely to be persistent.

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Authors

Daly, Mary C. (Federal Reserve Bank of San Francisco)
Hobijn, Bart (Federal Reserve Bank of San Francisco)
Şahin, Ayşegül (Federal Reserve Bank of New York)
Valletta, Robert G. (Federal Reserve Bank of San Francisco)

JEL Classifications

C78: Bargaining Theory; Matching Theory
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E32: Business Fluctuations; Cycles
J41: Labor Contracts

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