Academic Literature

US – Short and long-term unemployment exert equal downward pressure on price inflation says FEDS research

In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed.

Capture d’écran 2014-04-26 à 09.32.26This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation.However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation.

The authors present a model illustrating these issues and apply the model to data for U.S. metropolitan regions.They find that that short- and long-term unemployment exert equal downward pressure on price inflation.

 

Chosen excerpts by Job Market Monitor. Read the whole story at FRB: FEDS Abstract 2014-28.

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