What We Know and Do Not Know About the Natural Rate of Unemployment

Olivier Blanchard, Lawrence F. Katz

NBER Working Paper No. 5822
Issued in November 1996
NBER Program(s):   EFG   LS

Over the past three decades, a large amount of research has attempted to identify the determinants of the natural rate of unemployment. It is this body of work we assess in this paper. We reach two main conclusions. First, there has been considerable theoretical progress over the past 30 years. A framework has emerged. We present it, and show how it can be used to think for example about the relation between technological progrss and unemployment. Second, empirical knowledge lags behind. Economists do not have a good quantitative understanding of the determinants of the natural rate, either across time or across countries. We look at two issues, the relation of wages to unemployment, and the risk of European unemployment.

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Published: Journal of Economic Perspectives, 11, winter 1997, pp.51-72.

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