| | | | | Curiosity 12.2: Why Did the Natural Rate of Unemployment Fall in the Late 1990s? | | | | |
| | | | | Because the NRU, the natural unemployment rate, corresponds to the NAIRU, the nonaccelerating-inflation rate of unemployment, inflation should be decreasing for unemployment levels above the NRU and increasing for unemployment levels below the NRU. A graph of inflation changes against unemployment could therefore be used to find the unemployment rate corresponding to zero change in inflation and thus produce an estimate of the NRU. Such a graph for the years 1970-94 was provided in the first edition of this book, suggesting an NRU of about 6.5 percent. This method of estimating the NRU works well if the NRU has remained constant for an extended period of time. But in the late 1990s it became quite clear that the NRU had fallen dramatically the economy had moved down to an unemployment rate of 4.3 percent without any rise ir inflation | | | | |
| | | | | In chapter 3 we learned that the natural rate of unemployment was not a fixed, immutable figure; but rather one that could change as the character of an economy changed Economists have put forward several reasons explaining why the U.S. NRU fell during the late 1990s: | | | | |
| | | | | 1. The prolonged boom of the late 1990s caused a lot of people who might otherwise have been unemployed to gain job experience. This improved their labor skills, allowing them more easily to find and hold a job. As a result, both search and structural unemployment fell. Check curiosity 13.1 on hysteresis in chapter 13. | | | | |
| | | | | 2. The Internet has lowered the cost of job search, lowering search unemployment. Thousands of companies post help-wanted ads on the Internet, and there are more than 20 sites at which job seekers can check job listings or post their resumes. It is estimated that more than 3 million people use the Internet to look for work on any given day. | | | | |
| | | | | 3. Advances in computer technology have increased job opportunities for the disabled. For example, physically challenged people can work at home in the Software industry, and mentally challenged workers in the fast food industry can take orders without knowing how to add or read by touching pictures of items on a computer register. These advances have lowered structural unemployment. | | | | |
| | | | | 4. A welfare reform bill has imposed a five-year lifetime limit on welfare recipiency and a requirement that after two years people on welfare must attend training classes or participate in government-run jobs programs. These changes may lower institutionally induced unemployment. | | | | |
| | | | | 5. The demographics have changed groups that historically have had below-average unemployment rates are today a larger share of the workforce. | | | | |
| | | | | Supplementing this fall in the NRU are several reasons why the move to lower unemployment did not prompt businesses to raise prices during this boom: | | | | |
| | | | | 1. There was strong competition from abroad, because of free-trade agreements and the Asian slowdown. | | | | |
| | | | | 2. Costs fell as a result of lower oil, commodity, and computer prices, as well as a strong U.S. dollar. | | | | |
