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Challenges with Estimating U Star in Real Time

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  • Murat Tasci

Abstract

Although the concept of the natural rate of employment, NAIRU, or ?U star? is used to measure the amount of slack in the labor market, it is an unobservable quantity that must be estimated using data currently available. This Commentary investigates the degree to which our estimates of U star at various points in the current business cycle have changed as real-time data have been revised and as more data points have accumulated. I find that the availability of additional data has contributed to a significant change in our estimates of U star at earlier points in the business cycle, a result that suggests we might have been underestimating the level of labor market slack during some of the recent recovery period. In retrospect, our updated estimates of U star suggest labor markets were not as tight as we thought they were then.

Suggested Citation

  • Murat Tasci, 2019. "Challenges with Estimating U Star in Real Time," Economic Commentary, Federal Reserve Bank of Cleveland, issue November.
    • Handle: RePEc:fip:fedcec:00110
    DOI: 10.26509/frbc-ec-201918
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    References listed on IDEAS

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    1. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246, National Bureau of Economic Research, Inc.
    2. Murat Tasci, 2012. "The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate," Koç University-TUSIAD Economic Research Forum Working Papers 1233, Koc University-TUSIAD Economic Research Forum.
    3. Murat Tasci & Randal J. Verbrugge, 2014. "How Much Slack Is in the Labor Market? That Depends on What You Mean by Slack," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    4. Robert Shackleton, 2018. "Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model: Working Paper 2018-03," Working Papers 53558, Congressional Budget Office.
    5. Murat Tasci & Saeed Zaman, 2010. "Unemployment after the recession: a new natural rate?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
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