April 17, 2007
This paper assesses the natural rate of unemployment—the unemployment rate that arises from all sources other than fluctuations in demand associated with business cycles. The natural rate is determined by the rate at which jobs are simultaneously created and destroyed, the rate of turnover in particular jobs, and how quickly unemployed workers are matched with vacant positions. Those factors in turn depend on the characteristics of jobs and of workers and on the efficiency of the labor market’s matching process. Evidence points to a natural rate that has declined over the past two decades, in part as a result of shifts in the age composition of the labor force and in part because of some combination of an improved match between workers and jobs and a more efficient matching process.