Arnold Kling

Lower Trend Unemployment

Arnold Kling, Great Questions of Economics
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Brad DeLong uses another old analytical tool, the Phillips Curve, to estimate the rate of unemployment at which inflation is neither increasing nor decreasing, called the NAIRU.

in the early 1980s it was above 7%. But in the mid 1960s and today it has reached a trough of 4.5% or so.

I think, and I believe that DeLong would agree, that a big reason for the movement in the NAIRU is productivity. When productivity growth is below trend, as it was in the 1970's and 1980's, workers' wage demands are unrealistically high. When productivity growth is higher, firms can raise real wages and still maintain high levels of employment.

Discussion Question. How would a strengthening dollar have contributed to lowering the NAIRU?

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