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Repeats Story Initially Transmitted at 17:00 GMT Aug 14/13:00 EST Aug 14
--Implies Elimination of Labor Market Slack, Economists Find
--Estimates Longer-Run Unempl Rate In Narrow 4.5%-5.5% Range Over Past Century
By Jean Yung
     WASHINGTON (MNI) - The U.S. unemployment rate has dipped below its
longer-run rate and indicates the economy is at full employment, according to a
new estimate of the so-called natural rate of unemployment from two Federal
Reserve economists. 
     That rate, which is unobservable but key to monetary policymaking, likely
hovered in a narrow range between 4.5% and 5.5% for the past century, Regis
Barnichon of the San Francisco Fed and and Christian Matthes of the Richmond Fed
said in the latest edition of the San Francisco Fed's Economic Letter published
     "The most interesting aspect of our estimated u-star is its remarkable
stability over time," they wrote. 
     "Recent readings on the unemployment rate have been running slightly below
our estimated natural rate, implying the elimination of labor market slack." 
     The unemployment rate fell a tenth to hit a 16-year low of 4.3% in July,
below the Federal Open Market Committee's most recent estimate of its longer-run
rate, 4.6%. With the economy creating an average of 180,000 jobs a month for the
past year, the FOMC also projects the unemployment rate to fall further to 4.2%
in 2018 and 2019. 
     Fed Chair Janet Yellen acknowledged in June after raising the Fed's policy
rate by 0.25% that the labor market was tight. "With inflation below 2%, I think
it's appropriate that the labor market be that tight," she said. At the same
time, to avoid the risk of overheating the economy, it's "also a prudent move,
to move in a gradual way to remove accommodation." 
     Barnichon and Matthes in their study used a new statistical approach to
remove "cyclical fluctuations" in the unemployment rate while allowing the
natural unemployment rate to vary over time.  
     "Such variation could be explained by changes in labor market regulation,
demographic factors, and other reasons unrelated to the business cycle," they
     Surprisingly, large historical movements in the unemployment rate did not
feed through to the natural rate "as much as one might expect," because
inflation also behaved as the Phillips Curve predicted, they said. 
     During the Great Depression, when unemployment spiked 22 percentage points,
inflation also fell rapidly; the natural rate rose just 1 percentage point, the
economists found. During World War II, when the unemployment rate fell to less
than 1%, the natural rate also moved little. 
     During the Great Recession, Barnichon and Matthes' model found a temporary
increase in the natural unemployment rate of about 0.4 percentage point, as
workers took advantage of extended unemployment benefits. 
     That result also matches closely with the Congressional Budget Office's
estimate, the economists said. 
     The full Economic Letter is available at:
--MNI Washington Bureau; +1 202-371-2121; email: