A Kalman-Filter Approach to Estimating the Natural Rate of Unemployment

The terms “NAIRU” and “natural rate of unemployment” are not interchangeable. Further, while there is a consensus that the NAIRU represents an empirical macroeconomic relationship, little agreement exists regarding what is meant by the “natural rate of unemployment.” This paper estimates the natural rate of unemployment, defined here as the unemployment rate corresponding to equilibrium in the labor market. Rather than employ a Phillips curve, the model utilizes a macroeconomic-principles-level decomposition of the unemployment rate into its cyclical and noncyclical components. We then evaluate the estimated natural rate series by examining its relationship to structural variables from the labor market.