Labor markets are stabilizing after the upheavals brought on by the pandemic.
At the same time, there has been a reduction in the structural levels of unemployment.
Now, economies can tolerate lower rates of unemployment without causing higher rates of inflation.
Labor markets appear to be stabilizing after the upheavals in working arrangements and preferences brought on by the pandemic. Labor force participation is rising, and unemployment is low by historical standards.
It has been 15 years since the upheaval of the 2008−09 financial crisis, and unemployment rates in the U.S. and many other developed economies have returned to their long-term downtrends in place since then. That suggests that developed economies have further transitioned away from basic production industries to new roles in services and now advanced manufacturing.
At the same time, there has been a reduction in the structural levels of unemployment, which the Organisation for Economic Co-operation and Development has calculated as NAIRU—the non-accelerating inflation rate of unemployment.
NAIRU is the unemployment rate consistent with stable inflation. The across-the-board decline in NAIRU suggests that economies can tolerate lower rates of unemployment without causing higher rates of inflation.
For policymakers, the experience of low unemployment and volatile inflation suggests that the so-called trade-off between the demand for labor and the demand for goods is nowhere near as important as an economy’s supply of labor and supply of goods.
