The natural rate of unemployment has been declining since the 1980s. One reason is that the percentage of older workers (age 55 and over) has increased, from 12.1% in 2000 to 23.6% in 2020. Older workers who lose their jobs are more likely to retire and leave the labor force instead of adding to unemployment levels. The Cleveland Federal Reserve noted that “job polarization” has shifted the labor force into either low-skill or high-skill occupations. The middle-skill occupations have been replaced by technology, while high-skill workers are less likely to be laid off, which lowers the natural unemployment rate.
How the Natural Rate of Unemployment Works
Even in a healthy economy, there is some level of unemployment for three main reasons:
Should an Unemployment Rate of Zero Be the Goal?
When setting interest rates, the Federal Reserve seeks to balance unemployment with growth and inflation. It uses 2% as the target inflation rate. Economists agree that the ideal gross domestic product growth rate is around 2%. The Fed does not have a specific target for unemployment. It found that employers can find innovative ways to attract workers without raising wages. The only way an economy could have a 0% unemployment rate is if it is severely overheated. Even then, wages would probably rise before unemployment fell to absolute zero. The U.S. has never experienced zero unemployment. The lowest unemployment rate recorded was 2.5% in May and June of 1953. It occurred because the economy overheated during the Korean War. When this bubble burst, it kicked off the recession of 1953.
How Recessions Impact the Natural Unemployment Rate
The natural rate of unemployment typically rises after a recession. Frictional unemployment increases once the downturn is over. Workers become confident they can quit their jobs and find a better one. Structural unemployment can also increase as the numbers of long-term unemployed rise. Their skills and experience became outdated. The financial crisis of 2008 wiped out 8.7 million jobs and increased the unemployment rate to 10.2% in 2009. Many experts wondered if the severity of the recession would contribute to a higher natural rate of unemployment. The Cleveland Federal Reserve found that the recession shifted the natural rate a bit higher, but less so than expected given its severity. Long-term trends that drive down the rate of natural unemployment outweighed the short-term impact of the recession.
