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With an introduction by Markus Brunnermeier, Director of the Princeton Bendheim Center for Finance

On Thursday, October 29, Robert Hall joined Markus’ Academy for a lecture on the natural behavior of unemployment. Robert Hall is a Professor of Economics at Stanford University.

Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

Hall questions the existence of a single, constant natural rate of unemployment below which inflation pressures start to rise. In joint work with Marianna Kudlyak, Hall analyzes U.S. unemployment data after WWII and dismisses the notion of a constant natural rate of unemployment and praises the labor tightness measures in Diamond-Mortensen-Pissarides labor-search models.

At all times outside of crises, unemployment glides downward at a low but reliable rate. Unsurprisingly, Hall and Kudlyak find occasional sharp increases in unemployment during economic crises. Hall says it’s well-known that employment “rises like a rocket and drops like a feather,” but the new work demonstrates how uniform the rate of recovery is after recessions. Surprisingly, the log-unemployment rate declines linearly during boom phases with a constant slope across recessions (after 1959).

The Fed’s new policy of not raising the rates after hitting the natural rate of unemployment, and letting downward glide in unemployment continue during periods of calm, is consistent with Hall’s conclusions. Hall says the Fed is right not to worry about the natural rate of unemployment if it doesn’t trigger inflation.

To constantly reduce unemployment, policy should focus on containing the build-up of risks that trigger recessions and disrupt the economy’s natural path.

The pandemic highlights the importance of understanding the effects of recall unemployment. Hall says both jobless unemployment and recall unemployment (what we see during the pandemic as workers hope and wait to return to jobs after a temporary layoff) are associated with lower aggregate work effort and corresponding loss of earnings.