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How Low Can You Go? Economists Game Out U.S. Unemployment Bounds

The natural jobless rate may be lower, but one model suggests it's not by much

Move over, r-star. There’s a new natural rate coming into focus. 

Economists love to talk about natural rates. Put simply, they’re the level economic indicators should be at when growth has reached its potential and inflation is stable, given factors including demographics.

These are fundamentally important to how central banks assess economic progress. Recently, a lot of ink has been spilled over r-star – shorthand for the natural interest rate – because researchers think it’s lower than in the past. Now, because U.S. joblessness has plummeted but inflation just isn’t picking up, attention is turning to whether equilibrium unemployment, u-star, has also declined.

That important topic is the focus of the first study in our economic research wrap this week. It’s followed by a look at automation in the workforce, a dig into declining retirement security and a glance at economic views by U.S. political party. Check this column weekly for new and thought-provoking studies from central banks, academics and private researchers. 

100 Years of Unemployment

U-star, the level of unemployment that’s consistent with stable inflation and output at its long-run level, has hovered between 4.5 percent and 5.5 percent for much of the last 100 years, a Federal Reserve Bank of San Francisco study shows. That’s remarkably stable, which is important to an ongoing debate at the Fed. Joblessness has fallen to 4.3 percent, but inflation has yet to kick into high gear, leaving economists scratching their heads over whether the natural rate of unemployment might have fallen below its historically normal level. New York Fed President William Dudley on Monday suggested it’s possible that the Fed could let unemployment sink lower without inflation picking up. 

The San Francisco Fed researchers’ answer?  The natural rate is low today, but probably not much lower. “Our model indicates that the unemployment rate is slightly below our estimated natural rate in recent months,” they write. It’s just one study, so we can probably expect to hear more on this topic in coming months, especially if inflation stays low. 

The Natural Rate of Unemployment Over the Past 100 Years
Published August 14
Available on the San Francisco Fed website

Grandma Got Replaced by a Robot

Old, lower-skilled manufacturing employees lose jobs to robots amid minimum wage increases, new research from the University of California at Irvine’s David Neumark and London School of Economics’ Grace Lordan shows.

It’s a well-told story that sudden wage hikes spur job loss, and the innovation here is that the authors dig into just where those cuts happen. A $1 increase in the minimum wage decreases the share of low-skilled automate-able jobs by 0.43 percentage point, the authors find, but in manufacturing that jumps to 0.99 percentage point, and the share of older workers declines most sharply (women and black workers also post big drops). 

People Versus Machines: The Impact of Minimum Wages on Automatable Jobs
Published August 2017
Available on the NBER website

Close to Retirement, Out of Luck

Today’s aging workers are more financially vulnerable than previous groups of near-retirees, research from George Washington University’s Annamaria Lusardi and co-authors shows. The researchers looked at the financial situations workers faced when they were ages 56-61 across three different generations, and find that the group born in 1948-53 – the youngest cohort they examined – fared worse than their predecessors. About 71 percent of people in that group had debt on the verge of retirement, versus 64 percent for the group born 1931–1941. They also  had more debt: $32,700 in 2015 dollars on median versus $6,800 for the older group. 

The reason for the gap? Baby boomers surveyed had bigger mortgages, and they made smaller down payments. This matters, especially in the context of rising interest rates, which could leave borrowers paying more interest on debt than they’re earning on their savings as they head into retirement. 

Debt and Financial Vulnerability on the Verge of Retirement
Published August 2017
Available on the NBER website

Democrats Move Left, Economically 

Democrats are identifying themselves as more economically liberal, based on a new Gallup survey. About 33 percent of Democrats and Democrat-leaners said they were economically liberal in 2013-2017, up from 31 percent in 2009-2012. Gallup didn’t specify what’s liberal or conservative, and left it up to respondents to pick from a list ranging from ``very liberal’’ to ``moderate’’ and ``very conservative.’’

Economically moderate views were up across the board, including among Republicans. 

On net, the economically-conservative lead is shrinking, though it persists: more Democrats identify as economically conservative than Republicans as economically liberal.

Democrats Growing More Economically Liberal
Published Aug. 11, 2017
Available on the Gallup website

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