Why the Natural Unemployment Rate May Now Be Lower

24/7 Wall St.

179125086The Chicago Federal Reserve recently released a report showing its projections regarding the changing labor force composition and the natural rate of unemployment. What is interesting about the observation is that changes in the labor force composition may have lowered the natural rate of unemployment.

In short, more of the workforce would be employed in a full-employment scenario, or that the unemployment rate would be low even in a full-employment scenario — to 5.0% or less.

Another observation was that a lower natural rate may help explain why wage inflation and price inflation remain low, despite actual unemployment recently reaching 5.5%. The Chicago Fed’s report noted that demographic and other changes should continue to lower the natural rate for at least the remainder of the decade.

It is important to recall that the labor force participation rate has declined steadily over the past 15 years. Some of the decline was…

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