Discussion Paper Details

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Title: The Elusive State of Full Employment

Author(s): Antonio Fatás

Publication Date: September 2021

Keyword(s): business cycles, Natural rate of unemployment, Potential Output and recoveries

Programme Area(s): Monetary Economics and Fluctuations

Abstract: During the expansion phase of the business cycle unemployment declines towards levels that are usually associated to the natural rate of unemployment. Unfortunately, those low levels of unemployment are short lived. In the last 60 years, the US has not witnessed a long period of stable and low unemployment. We argue that this result is consistent with an asymmetric view of the business cycles (as in Friedman's plucking model) where many expansions are unfinished business, they end too early. The speed of labor market recovery is too slow and before the economy reaches full employment a recession starts, either because of imbalances or bad luck. Our analysis has implications for how we think about labor market slack and potential output. From a policy perspective it calls for a focus on faster recoveries while avoiding the type of imbalances that can be the seed of the next crisis.

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Bibliographic Reference

Fatás, A. 2021. 'The Elusive State of Full Employment'. London, Centre for Economic Policy Research.