Afternoon Must-Read: Andrew Harless: Employment, Interest, and Money: An Ultraminimalist Model of the Beveridge Curve, or, How I Learned to Start Worrying and Love Structural Unemployment

Andrew Harless: Employment, Interest, and Money: An Ultraminimalist Model of the Beveridge Curve, or, How I Learned to Start Worrying and Love Structural Unemployment: “The cumulative sum of the residuals peaks in July 2006…

…suggesting that there may be a structural break in August. A casual look at the residuals strongly suggests another structural break in July 2010. Both purported structural breaks go in the same direction: a decline in the number of hires associated with any given number of job openings. So, contrary to what I said in 2010, it does look like we are seeing more structural unemployment now than in the past…. So what does all this imply about the natural rate of unemployment?… If the relationship between hiring and unemployment is stable, as it appears to be, then my model implies that shifts in the matching function will determine a shifting relationship between the (assumed constant) NAIRV and the NAIRU (Non-Accelerating Inflation Rate of Unemployment, a.k.a. the natural rate of unemployment). For what it’s worth, my estimates suggest that the hypothesized August 2006 and July 2010 shifts in the matching function would, collectively, increase the NAIRU by a factor of about one and a third. So if the NAIRU was 4.5% (my best guess, which happens to be conveniently divisible by 3) in July 2006, it is 6% now…