Tags: unemployment | natural | Fed | work

Unemployment Level Near Normal

By    |   Wednesday, 12 February 2014 07:02 AM

The unemployment rate cannot fall too low without creating inflationary pressures. Economists believe there is a minimum level of unemployment that is healthy for the economy. This is known as the non-accelerating inflation rate of unemployment (NAIRU), or the natural rate of unemployment.

NAIRU varies with economic conditions, but the Federal Reserve currently believes the proper rate of unemployment is near 6 percent.

The difference between the number of unemployed in the most recent Bureau of Labor Statistics report (10.2 million) and the Fed's targeted number of unemployed (9.3 million) is about 900,000. That is the number of people who could be employed without increasing inflationary pressures in the economy. While 900,000 is a significant number of people, it represents only 0.6 percent of the U.S. workforce and less than 0.3 percent of the population. Higher inflation would affect more than 313.9 million Americans, or 100 percent of the population.

Congressional leaders and the president must decide whether to base decisions on anecdotes or data. With more than 10 million people counted as unemployed, finding a story about the pain of unemployment is easy enough for any mainstream media reporter or political operative. Lost in those stories is the reality that the Fed believes 9.3 million unemployed is natural in a smoothly running economy.

Reacting to anecdotes by increasing unemployment benefits could decrease the incentive to work for some and increased benefits could explain why unemployment remains above the natural rate.

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MichaelCarr
The unemployment rate cannot fall too low without creating inflationary pressures. Economists believe there is a minimum level of unemployment that is healthy for the economy. This is known as the non-accelerating inflation rate of unemployment (NAIRU), or the natural rate of unemployment.
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2014-02-12
Wednesday, 12 February 2014 07:02 AM
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