The US unemployment rate fell to 5.5 percent in February 2014, within easy reach of the so-called natural rate, estimated to be 5.9 percent. Stock markets fell on inflation fears, but a closer look shows that those fears are exaggerated

1. Economics for your Classroom from
Ed Dolan’s Econ Blog
Inflation Jitters Emerge as
Unemployment Nears
Natural Rate
Mar 8, 2015
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2. Economy Adds 295,000 Jobs in February
 The economy added a healthy
295,000 payroll jobs in February
2015, according to the latest report
from the Bureau of Labor Statistics
 It was the twelfth consecutive month
of job growth above 200,000, making
it the best full-year period since the
late 1990s
March 8, 2015 Ed Dolan’s Econ Blog

3. Unemployment Rate Hits 5.5 Percent
 The US unemployment rate fell to 5.5
percent in February, a new low for the
recovery.
 The unemployment rate is the ratio of
unemployed persons to the labor force.
The labor force shrank by 178,000 for
the month, following unusually strong
growth in January. The number of
employed persons increased by 96,000
and the number of unemployed
decreased by 274,000
 The household survey on which
unemployment data are based uses a
different methodology from the
establishment survey of payroll jobs
March 8, 2015 Ed Dolan’s Econ Blog

4. Unemployment Approaches Natural Rate
 The latest decrease brought
joblessness close to the so-called
natural rate of unemployment, the
rate that would prevail based on
structural factors alone, without
influence from the business cycle
 That rate is also known as the non-
accelerating inflation rate of
unemployment or NAIRU. The term
reflects a belief that inflation will begin
to accelerate when inflation is lower
than the NAIRU.
 The Congressional Budget Office
currently estimates the NAIRU to be
5.39 percent
March 8, 2015 Ed Dolan’s Econ Blog

5. Stock Markets Fall on Inflation Fears
 Stock markets fell on inflation fears
as unemployment neared the NAIRU
 Evidently, some market participants
expect the Fed to begin raising rates
as soon as unemployment drops
below the natural rate
 However, inflation, as measured by
the Fed’s favored indicator, the
personal consumption expenditure
index (PCE index) remains far
below the Fed’s 2 percent target
 As of Q4, the latest reading for the
PCE index, inflation was just 1
percent. Early indications suggest
that it will slow further in Q1 2015
March 8, 2015 Ed Dolan’s Econ Blog

6. More Labor Market Slack than Meets the Eye
 One reason that inflation is not
increasing is that there is more slack in
the labor market than indicated by the
standard unemployment rate
 The BLS publishes an alternative
measure of unemployment, U-6, that
includes discouraged workers and
involuntary part-time workers
 U-6 fell to 11 percent in February, also a
low for the recovery, but it remains a full
2 percent above its prerecession level, a
bigger gap than for the standard
unemployment rate
March 8, 2015 Ed Dolan’s Econ Blog

7. Long-term Unemployment
 Another sign of slack is a high level of
long-term unemployment
 Those out of work 27 weeks or more still
total more than 31 percent of the labor
force, about twice the prerecession level
 The decrease in the percent of long-term
unemployed has stalled in the past six
months
March 8, 2015 Ed Dolan’s Econ Blog

8. Involuntary Part-Time Workers
 Still another sign of slack is the large
number of people working part time
“for economic reasons,” that is,
because they can only find part-time
work or because their employers have
cut their hours due to slack demand
 The percentage of the labor force
working part time for economic
reasons has been falling steadily and
hit a new low for the recovery in
February, but it remains much higher
than it was before the Great
Recession began
March 8, 2015 Ed Dolan’s Econ Blog

9. The Bottom Line: Labor Market Strong but Little Risk of Inflation
 The labor market is improving steadily
and is now very close to the NAIRU, or
natural rate of unemployment
 However, considerable slack remains in
the economy, as shown by indicators like
U-6, long-term unemployment, and
involuntary part-time work
 With little risk of inflation, fears that the
Fed will soon begin tightening policy may
be exaggerated
March 8, 2015 Ed Dolan’s Econ Blog

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