[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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WINNERS OF THE NOBEL PRIZE IN ECONOMICS
You can learn more about the research contributions of
Milton Friedman, Robert Lucas, and other winners of the
Nobel Prize in Economic Sciences at www.almaz.com/nobel/
economics/economics.html.
SHIFTS IN THE NATURAL RATE
Though the concept of the natural rate of unemployment is well accepted, economists
do differ in their judgments of the critical level of unemployment below which
inflation increases. Because the natural rate itself may vary over time, our estimates
of it are quite imprecise. In the late 1980s, most economists thought it was around
6 percent or slightly higher. As the unemployment rate fell to 5.6 percent in 1995,
then to 5.4 percent in 1996, and eventually to 3.9 percent in 2000 without evidence
that inflation was increasing, more and more economists believed the natural rate
had decreased. Today, few economists believe the evidence is strong enough to yield
a precise value; the best that can be done is to identify a range of plausible values.
Most current estimates of the natural rate fall in the range of 5 to 5.5 percent.
Some of the changes in the natural rate are predictable. There is always some frictional
unemployment, as people move from job to job. Such movements are more
common among new entrants into the labor force; in the 1970s, these were numerous
as the baby boomers reached working age and as more women began working
outside the home. As a result, the natural rate increased. In the 1990s, these trends
reversed themselves, partially accounting for the decline in the natural rate of unemployment.
Government policies to help workers move quickly from one job to another
may lower the natural rate. Similarly, because competitive pressures have increased
and unionization has decreased, wages more frequently fall and are slower to rise.
This change too has helped lower the natural rate.
Case in Point
THE BABY BOOMERS AND THE NATURAL RATE
The natural rate of unemployment is not a constant. One reason it changes is that
the demographics of the labor force change over time. The prime example of the
role of demographics is provided by the effect of the baby boomers.
We have focused on the overall unemployment rate, the fraction of the total civilian
labor force that is unemployed. However, not all groups in the labor force experience
the same unemployment rate. Teenagers, for example, have much higher
unemployment rates than older workers. At the end of 2000, while the overall unemployment
rate averaged only 4 percent, the rate for females sixteen to nineteen years
SHORT-RUN INFLATION ADJUSTMENT ∂ 829