The Natural Rate of Unemployment in the U.S.

Given today’s economic situation, what is the natural rate of unemployment in the U.S today?

To answer that question, we’re dusting off an old tool today, which we originally developed back in August 2007 to find out how much slack there was in the job market at that time.

Back then, the U.S. economy was still growing, which it did all the way through the end of that year, as the economic expansion peaked in December 2007 before heading south toward recession in January 2008.

But in August 2007, there were questions of whether the economy was becoming too heated, which is something that might be determined if the official unemployment rate dropped below the “natural” rate of unemployment. In August 2007, we found that the natural rate of unemployment was 4.31%, while the official rate of unemployment was 4.53%, indicating that the economy was not in danger of overheating.

In retrospect, with a recession beginning just five months later, that seems like an understatement.

Today though, the news media is filled with reports that the jobs market has finally turned positive, so our question then has more to do with finding out what its potential for improvement might be.

And that’s why we’re asking what the natural rate of unemployment might be, because that would define the best case scenario for today’s unemployment rate.

To answer the question, we’ll be extracting the following data from the following sources:

Employment Situation (EMPSIT)

This report is produced monthly and contains the number of employed and the number of unemployed for the total U.S. civilian workforce. The appropriate data is found in Table A-1 in the data section of the report.

Job Openings and Labor Turnover (JOLTS)

This report is produced quarterly and provides the numbers of those newly hired or who have recently separated from their previous employment in the civilian workforce. This data is found in Table A of the main body of the report.

In using the tool below, the best results will be obtained if all the entered data applies for the same month. With that in mind, our updated default data in the tool below applies for January 2012, as the JOLTS data is only current through that month at this writing (you can update the data yourself with more current data as it is published):

In the tool, the labor market is considered to be overheating when the official rate of unemployment is below the natural rate of unemployment. That’s definitely not the case for January 2012, with a natural rate of unemployment of 7.87% and an official rate of unemployment of 8.26%.

The natural unemployment rate of 7.87% also suggests that the current pace of job creation as given by the JOLTS data will not be sufficient to significantly lower the official rate of unemployment, which we’ve already seen with the February 2012 employment situation report, where the official rate of unemployment came in at 8.27%, up slightly from the previous month.

That outcome agrees with our tool’s finding for the data of January 2012: there’s a lot of slack in the job market, so there will be little prospect of significantly altering the official unemployment rate data in the short term.

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