US unemployment vs natural rate
A key building block of modern, neo-Keynesian macroeconomic theory is that the business cycle is symmetric: the economy fluctuates around the natural rate of interest and the natural rate of unemployment. Accordingly, output gaps should as a first approximation follow a normal distribution.
However, as our economist Julius Probst, PhD recently argued in a Mercatus research paper, the US economy seems to behave instead like Milton Friedman’s plucking model: the economy will follow trend output over time – that is, while there are no artificial booms that push the economy above trend, recessions do pull the economy below potential. Moreover, the steeper the initial decline, the larger the subsequent recovery.
Our first chart shows this inherent asymmetry in the labour market. Since the 1980s, the actual unemployment rate has remained above the natural rate estimated by the Congressional Budget Office (CBO) some 80% of the time.