One of the ways that government tends to tackle difficult problems is to redefine parameters in a manner that minimizes the problem. Inflation is a good example. Over the years we have seen “refinements” in the metrics used to measure its severity as well as a definition which excludes the inflation rate of certain components as extraneous given the natural volatility of those goods. Energy and food prices are considered non-core items and excluded from the calculation of the inflation rate. Most consumers have a different view of things.
So it shouldn’t come as a surprise that we might well be witnessing the birth of a new benchmark for full employment.
From the San Francisco Fed:
Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years. It is important to stress that each of the methods used to estimate the natural rate is subject to considerable error, especially given the limited experience of very high unemployment in the post-World War II U.S. economy. As the recovery proceeds, we should develop a clearer picture of the new normal rate of unemployment.
The entire paper is worth a quick read (don’t worry, it’s not long), as the authors lay out their logic for an increase in the natural rate of unemployment. It’s also worth underscoring their opinion that any increase might well be temporary.
But, put this sort of thing in a politician's hands and magical things happen. Repeat anything often enough and a lot of people start to believe it. If you start hearing a lot of talk about a “new natural rate” assume that a move is afoot to define the unemployment problem out of existence. A lot of people will still be looking for work but we will all be assured that this is a natural state undeserving of governmental attention. Out of sight out of mind, so to speak.
For a look at another point of view, here’s a graph from Jake at EconompicData.com. He thinks that the natural rate might never have been as low as advertised (click to enlarge):
My guess is that it will prove to be vexing at the very least to get unemployment down to any sort of acceptable level, at least in time for the 2012 elections, so marginalizing the issue will be the strategy.