05-08-2018, 03:28 AM
With unemployment below 4%, the question of how low it can get without sparking wage and price inflation is more relevant than ever. Unfortunately, our understanding of this problem hasn't improved, as this useful article shows:
Another monthly jobs report, another growing chorus worried that we might be employing too many people and we should hold back the economy lest it overheats. It was announced Friday that 164,000 new jobs were added in April, and the unemployment rate reached 3.9 percent. It has been 18 years since unemployment was under 4 percent. As unemployment continues to fall, people wonder, how low could it go? And what if it gets below the dreaded “natural rate of unemployment” that economists like to talk about?
The ability of unemployment to predict changes in inflation is essentially zero over the past 20 years, they found. As a result, there’s no ability to predict a range, much less a rate, of natural unemployment. They conclude that the “50-percent confidence band in 2014 ranges from 4.3 to 6.1” for the natural rate of unemployment. That estimate range is so vast it simply can’t guide policy.
The April jobs report reopens an old debate: how low can unemployment go? - Vox