The anatomy of unemployment in the United States reveals frequent short spells of
unemployment. Nonetheless, a substantial fraction of U.S. unemployment is
accounted for by those who are unemployed for a large portion of time.
There are significant differences in unemployment rates across age groups and
race. Unemployment among black teenagers is highest, and that among white
adults is lowest. The young and minorities have significantly higher unemployment
rates than middle-aged whites.
The concept of the natural, or frictional, rate of unemployment singles out the part of
unemployment that would exist even at full employment. This unemployment arises
from the natural frictions of the labor market, as people move between jobs. The natural
rate is hard to measure, but the consensus is to estimate it at about 5.5 percent, up
from the 4 percent of the mid-1950s. The official (CBO) estimate is 5.2 percent.
Policies to reduce the natural rate of unemployment involve structural labor market
policies. Disincentives to employment and training, such as minimum wages, and
incentives to extended job search, such as high unemployment benefits, tend to
raise the natural rate. It is also possible that unemployment displays hysteresis,
with extended periods of high unemployment raising the natural rate.
The costs of unemployment are the psychological and financial distress of the
unemployed, as well as the loss of output. In addition, higher unemployment tends
to hit the poorer members of society disproportionately.
The economy can adjust to perfectly anticipated inflation by moving to a system
of indexed taxes and to nominal interest rates that reflect the expected rate of inflation. If inflation were perfectly anticipated and adjusted to, the only costs of
inflation would be shoe-leather and menu costs.
Imperfectly anticipated inflation has important redistributive effects among sectors.
Unanticipated inflation benefits monetary debtors and hurts monetary creditors.
The government gains real tax revenue, and the real value of government
debt declines.
In the U.S. housing market, unanticipated increases in inflation, combined with the
tax deductibility of interest, made housing a particularly good investment during
the 1960–1980 period.
In the U.S. economy, indexation is neither very widespread nor complete. The
absence of strong indexation probably eased the adjustment to supply shocks.
While very high inflation rates are bad, there is some evidence that a small positive
inflation rate lubricates the economy by reducing real wage rigidity.
The political business cycle hypothesis emphasizes the economy’s direction of
change. For incumbents to win an election, the unemployment rate should be falling
and the inflation rate not worsening.
