Working Paper Series 

2007-06 

Congressional Budget Office 

Washington, D.C. 

April 2007 

The Natural Rate of Unemployment 

David Brauer 

(e-mail: davidb@cbo.gov) 

 

Abstract 

This paper assesses the natural rate of unemployment—the unemployment rate 

that arises from all sources other than fluctuations in demand associated with 

business cycles. The natural rate is determined by the rate at which jobs are 

simultaneously created and destroyed, the rate of turnover in particular jobs, and 

how quickly unemployed workers are matched with vacant positions. Those 

factors in turn depend on the characteristics of jobs and of workers and on the 

efficiency of the labor market’s matching process. Evidence points to a natural 

rate that has declined over the past two decades, in part as a result of shifts in the 

age composition of the labor force and in part because of some combination of an 

improved match between workers and jobs and a more efficient matching process. 

Working papers in this series are preliminary and are circulated to stimulate discussion and critical comment. These 

papers are not subject to CBO’s formal review and editing processes. The analysis and conclusions expressed in 

them are those of the authors and should not be interpreted as those of the Congressional Budget Office. References 

in publications should be cleared with the authors. Papers in this series can be found at www.cbo.gov (select 

Publications and then Working Papers). 

Special thanks go to Robert G. Valletta of the Federal Reserve Bank of San Francisco for supplying data and to 

Adam Weber of CBO for assistance with preparation of the figures for this paper. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 2 

The Congressional Budget Office (CBO) projects the growth in labor input as a part of its 

forecast. A key element in that projection is what is sometimes called the natural rate of 

unemployment, the average unemployment rate that stems from sources other than the business 

cycle.1 Post-World War II historical data show that while the unemployment rate rises in 

recessions and falls during expansions, it also has a significant noncyclical component that has 

varied over time, rising in the late 1960s and throughout the 1970s and declining after the early 

1980s (see Figure 1). In CBO’s most recent forecast, the natural rate was estimated at 5.0 percent, 

both currently and for the 10-year projection period through 2017; it is lower than the 6.0 percent 

rate of the mid-1980s.2

 Nonetheless, economists are uncertain about what the current natural rate 

is, how much it has fallen in recent years, and how it might evolve in the future. This paper 

examines the evolution of the natural rate of unemployment. 

The natural rate of unemployment is determined by frictions and structural rigidities in the labor 

market. Each job has attributes—wages, hours, working conditions, required skills, and location, 

for example. Each potential worker also has a set of skills, abilities, and work preferences. 

Employment occurs when there is a match between a particular worker and a particular job. At 

any given time, however, some workers will not have jobs, some jobs will be unfilled, and some 

potential workers will not be participants in the labor force. Vacancies can arise as new jobs are 

created and as workers separate voluntarily or involuntarily from their jobs. At the same time, 

unemployment occurs as existing jobs are eliminated and as people enter (or re-enter) the labor 

force. (When separation occurs because a worker and job are poorly matched, and the worker 

remains in the labor force, the result is both an additional vacancy and additional unemployment.)

The unemployment rate will depend in part on the rate at which vacancies and unemployment 

simultaneously occur as a result of the microlevel decisions made by individual people and 

 1

 The concept of the natural rate is related to what is sometimes termed the non-accelerating inflation rate of 

unemployment, or NAIRU. In the long run, the two rates are expected to be equivalent; however, this need not be the 

case over a near-term forecasting horizon. The gap between the actual unemployment rate and the natural rate is just 

one of several factors CBO uses to make its near-term projections of inflation. 

2 See Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2017

(January 2007). 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 3 

Figure 1. 

Unemployment Rate, 1948 to 2007

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

12

10

8

6

4

2

Unemployment Rate

Source: Bureau of Labor Statistics. 

Note: The shaded vertical bars indicate business-cycle recessions, as determined by the National Bureau of Economic Research. 

 

businesses. Thus, other things being equal, a higher rate of structural change in the economy—as 

exhibited by the simultaneous creation and destruction of jobs—will tend to result in a higher rate 

of unemployment. Similarly, higher rates of individual turnover in existing and continuing jobs 

also will be associated with higher unemployment. Turnover rates depend in part on the nature of 

jobs; but more important, they are heavily influenced by the age mix of the adult population. The 

age mix also influences the rate at which people enter and exit the labor force. 

The unemployment rate also will depend on how quickly a typical vacancy can be filled. Broadly 

speaking, that in turn depends on two factors: how well the characteristics of unemployed job 

seekers fit those sought by employers and how efficiently the process of matching job seekers and 

job openings operates. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 4 

Table 1. 

Unemployment Rate by Age and Sex, 2006 

Male Female Both Sexes 

 16 to 19 16.8 13.8 15.3 

 20 to 24 8.7 7.6 8.2 

 25 and Older 3.5 3.7 3.6 

 25 to 34 4.5 4.9 4.7 

 35 to 44 3.3 3.9 3.6 

 45 to 54 3.1 3.1 3.1 

 55 and Older 3.0 2.9 3.0 

Total, 16 and Older 4.6 4.6 4.6

Source: Bureau of Labor Statistics. 

Composition of the Labor Force 

Shifts in the composition of the labor force—the relative number of people in a given age group 

or the relative proportion of men and women—can influence the unemployment rate. The most 

important dimension is age, particularly the fraction of the labor force that is young. Workers 

between the ages of 16 and 24 often experience unemployment as they look for a first job or 

return to the labor force after attending school or receiving support from parents. Younger 

workers also are more likely to change jobs than are workers over the age of 25. Many older 

workers have settled into careers, and they are less likely than are younger workers to leave jobs 

because the work does not match their abilities and preferences. 

The data on unemployment underscore the age differences (see Table 1). In 2006, 15.3 percent of 

teenaged workers were unemployed, as were 8.2 percent of workers between the ages of 20 and 

24. That is in contrast to an overall unemployment rate of 4.6 percent. Those substantial 

differences are reflected in CBO’s estimates of the natural rate of unemployment over the past 

35 years, which have largely (although not entirely) reflected shifts in the population’s age 

distribution (see Figure 2). 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 5 

 

Figure 2. 

Demographics and the Natural Rate of Unemployment 

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

6.4

6.2

6.0

5.8

5.6

5.4

5.2

5.0

4.8

Percent

Actual Projected

Current CBO Estimate of Natural Rate Effect of Demographics

Source: Congressional Budget Office. 

Notes: The dashed line shows the unemployment rate calculated by holding the rates within groups defined by age and sex at their 

2005 level, but with population shares varying over history and as projected by the Social Security Administration and with groupspecific labor force participation rates varying over history and as projected by CBO. The shaded vertical bars indicate businesscycle recessions, as determined by the National Bureau of Economic Research.

In its summer 2006 forecast, CBO reduced its estimate of the current natural rate from 5.2 percent 

to 5.0 percent, reflecting a decline since the mid-to-late 1990s in the share of the labor force that 

is below the age of 25. That decline is attributable not to a change in the age mix of the general 

population, but to an unexpected sharp and sustained drop in the labor force participation rate of 

teens and young adults, most likely because of higher rates of school enrollment.3

 The labor force 

participation rate for 16- to 19-year-olds fell from 52.0 percent in 2000 to 43.7 percent in 2005 

and 2006. The participation rate for 20- to 24-year-olds declined similarly, although less 

dramatically, from 77.8 percent in 2000 to 74.6 percent in 2005 and 2006. The participation rate 

3

 See Congressional Budget Office, What Is Happening to Youth Employment Rates? CBO Background 

Paper (November 2004). 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 6 

 

among people ages 55 and older has risen. Since 2000, those shifts in the participation rate 

together have reduced the aggregate unemployment rate by 0.2 percentage points. However, 

CBO’s projections for growth in the labor force by age would indicate that no further decline is to 

be anticipated over the next decade. 

A generation ago, the gender mix also mattered; at least part of the increase in the natural rate of 

unemployment throughout the 1970s was attributable to rapidly rising labor force participation 

among adult women. At the time, the unemployment rate usually was higher among women than 

among men, largely because women as a group had less job experience and tended to move in and 

out of the labor force in their child-bearing years. For the past two decades, however, the 

unemployment rate of women actually has been on average slightly below that of men, and 

women’s share of the labor force has been relatively stable (see Figure 3). 

A change in national disability policy also might have contributed to the reduction in the average 

unemployment rate. The Disability Benefits Reform Act of 1984 relaxed federal restrictions on 

eligibility for Social Security Disability Insurance (DI). Since the mid-1980s, there also has been 

a general decline in job opportunities and relative wages for workers without postsecondary 

education. The increase in the number of DI recipients, particularly men, has been concentrated 

among the least educated. Therefore, for some eligible people without college degrees, receiving 

DI benefits could have become a more attractive prospect than remaining in the labor market.4

 As 

a result, some people who would otherwise have had an above-average incidence of 

unemployment were removed from the labor force all together. According to David Autor and 

Mark Duggan, that factor alone might have reduced the natural rate by as much as half a 

percentage point since the mid-1980s. 

4

 See David H. Autor and Mark G. Duggan, “The Rise in the Disability Rolls and the Decline in 

Unemployment,” Quarterly Journal of Economics, vol. 118 (2003), pp. 57–205. 

 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 7 

Figure 3. 

Unemployment Rates, by Sex, 1960 to 2007

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

10

8

6

4

2

0

48

46

44

42

40

38

36

34

32

Percent

Unemployment Rate: Men, 20 and Older Unemployment Rate: Women, 20 and Older

Female share of Labor Force (right scale)

Sources: Congressional Budget Office and Bureau of Labor Statistics. 

Note: The shaded vertical bars indicate business-cycle recessions, as determined by the National Bureau of Economic Research. 

Educational attainment, another factor that could lower unemployment, has increased over the 

past several decades. Better educated workers can perform a wider range of jobs, and vacant 

positions can be filled more quickly. The consequence of this improved match between 

employers’ needs and workers’ abilities is reduced unemployment. The existence of a more 

highly skilled workforce also could reduce unemployment if it causes employers to become more 

willing to commit resources to training. In that case, the employers’ investments in training may 

give them additional incentives to minimize turnover. Moreover, better educated workers may be 

better able to search for new jobs while they are still employed, and thus more likely to move 

from one job to another without ever becoming unemployed. The importance of those effects is 

difficult to assess, however, in part because dimensions of skill other than educational attainment 

are difficult to measure. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 8 

 

Job Stability, Churning, and Turnover 

Changes in the structure of the labor market—the mix of available jobs—can influence the 

unemployment rate. A relatively rapid rate of structural change can result in the simultaneous 

creation and loss of a large number of jobs, thus increasing the average unemployment rate by 

simultaneously creating vacancies and unemployment. This also can occur if the mix of jobs 

shifts away from those characterized by stable, long-term employment relationships and toward 

those with higher rates of turnover. The effects might be amplified to the extent that structural 

change entails shifts in the demand for workers with particular sets of skills; retraining takes time, 

so the duration of unemployment or nonparticipation could rise. 

There is only mixed evidence that those phenomena have become more important over time, but 

some data suggest that unemployment associated with structural changes has declined. Data from 

the Business Employment Dynamics series indicate that the rate of simultaneous job creation and 

destruction has been significantly lower during the current expansion than it was during the 

expansion of the 1990s, implying, other things equal, a lower average unemployment rate (see 

Figure 4).5 The rates of job creation and destruction in manufacturing are currently at historic 

lows.6 Data on individual turnover suggest that, by the end of 2006, hiring, job opening, and 

separation rates were all comparable to those of the final several months of the 1990s expansion.7

And the prevalence of long-tenured jobs also appears to have changed little over the past several 

decades.8

 

5

 The Bureau of Labor Statistics’ Business Employment Dynamics series measures net job gains in opening 

and expanding establishments and net job losses in closing and contracting establishments over the course of a 

quarter. Data from the series are available for the third quarter of 1992 through the second quarter of 2006. 6

 R. Jason Faberman, Job Flows and the Recent Business Cycle: Not All “Recoveries” Are Created Equal,

Working Paper 391 (U.S. Bureau of Labor Statistics, February 2006). 7

 This is based on data from the Job Openings and Labor Turnover Survey (JOLTS), which measures 

monthly rates of hiring and separation from jobs and the number of job openings at the end of each month. As of 

mid-April 2007, JOLTS data were available for the period from December 2000 through the end of February 2007. 8

 See Ann Huff Stevens, The More Things Change, the More They Stay the Same; Trends in Long-Term 

Employment in the United States, 1969–2002, Working Paper 11878 (Cambridge, Mass.: National Bureau of 

Economic Research, December 2005). 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 9 

Figure 4. 

Private-Sector Gross Job Gains and Losses, 1992 to 2006

1992 1997 2002

8.5

8.0

7.5

7.0

6.5

6.0

5.5

Percentage of Employment, Quarterly

Gross Job Gains Gross Job Losses

Source: Congressional Budget Office. 

Note: The shaded vertical bar indicates a business-cycle recession, as determined by the National Bureau of Economic Research. 

Changes in the mix of industries, however, may have led to reduced job stability. In particular, the 

share of jobs in manufacturing, a sector in which jobs in the past tended to be relatively stable, 

has declined sharply. The largest gains in the share of employment have been in professional and 

business services, in leisure and hospitality services, and in education and health services (see 

Figure 5). Leisure and hospitality shows above-average rates both of simultaneous job creation 

and destruction and of individual worker turnover. By contrast, there tends to be lower turnover in 

education and health services jobs (see Table 2).
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 10 

Table 2. 

Turnover Rates for Selected Industries, 2005 

(Percentage of total employment) 

Job 

Churning 

Individual 

Turnover 

Private Sector 

Construction 22.7 11.3 

Manufacturing 8.3 5.0 

Service providing 13.6 n.a. 

Retail trade 13.4 9.2 

Information 10.1 n.a. 

Financial activities 11.3 n.a. 

Professional and business services 16.3 10.0 

Education and health services 9.0 5.1 

Leisure and hospitality services 18.4 12.7 

Total Private Sector 13.8 7.8 

Government n.a. 2.8 

Total — 7.0 

Source: Congressional Budget Office based on Bureau of Labor Statistics data. 

Note: Job churning is the sum of quarterly gross job gains and gross job losses, as a percentage of total employment, determined 

on the basis of Business Employment Dynamics data. Individual turnover is the sum of monthly hires and separations as a 

percentage of total employment, determined on the basis of data from the Job Openings and Labor Turnover Survey. 

n.a. = not available; — = not applicable. 

Labor Market Efficiency

The final determinant of the natural rate of unemployment is the rate at which vacancies, once 

created, are filled. Any improvement in the efficiency of that process will result in a lower rate of 

unemployment. Analysts have cited two major efficiency-enhancing changes in the labor market 

in recent years—the expansion of the temporary-help industry and prospective employees’ use of 

the Internet to search for jobs. 

Employment in the temporary-help industry expanded from just over 400,000 people (0.5 percent 

of total payroll employment) in 1982 to 3.5 million (2.7 percent of the total) in mid-2000, 

although it declined sharply during the 2001 recession (see Figure 6). In particular, two studies 

concluded that the growth of this industry could account for a 0.2- to 0.4-percentage-point decline 

in unemployment during the period.9

 9

 Lawrence F. Katz and Alan B. Krueger, “The High-Pressure Labor Market of the 1990s,” Brookings 

Papers on Economic Activity, vol. 1 (1999); Maria W. Otoo, Temporary Employment and the Natural Rate of 

Unemployment, Finance and Economics Discussion Series, Paper 1999-66 (Federal Reserve Board of Governors, 

December 1999). 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 11 

Figure 5. 

Employment Share, Selected Industries, 1979 to 2007 

1979 1984 1989 1994 1999 2004

22

20

18

16

14

12

10

8

6

Percent

Manufacturing Education and Health Services

Professional and Business Services Leisure and Hospitality

Source: Congressional Budget Office. 

Note: The shaded vertical bars indicate business-cycle recessions, as determined by the National Bureau of Economic Research. 

Figure 6. 

Employment in Temporary-Help Agencies, 1981 to 2007 

1981 1986 1991 1996 2001 2006

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Percentage of Establishment Employment

Previous Measure 

Current Measure

Source: Congressional Budget Office.

Note: The shaded vertical bars indicate business-cycle recessions, as determined by the National Bureau of Economic Research. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 12 

 

Temporary-help agencies can help employers fill vacancies expediently. Job seekers can benefit 

as well by going to work for an agency rather than remain unemployed while they search for 

permanent work. Moreover, some employers end up offering permanent positions to employees 

they find through such agencies. Despite what seemed to have been a trend, however, the portion 

of the labor force filled by temporary workers flattened after the recession and has not yet 

rebounded to its 2000 level. That sector therefore cannot account for any further decline in 

unemployment since the late 1990s.10

Some analysts have speculated that the Internet could be a faster route to employment than other 

methods job seekers have used in the past. Although initial findings suggested that was a 

plausible assumption, more recent analysis suggests that Internet use may in fact not have reduced 

search time.11 Still, the Internet might have enhanced the labor market’s efficiency by facilitating 

direct moves from one job to another, without interim unemployment, although that assumption 

seems questionable as well. 

Recent evidence suggests that the job-finding rate (which includes the rate at which people move 

directly from one job to another) is much more important than is the separation rate in explaining 

cyclical fluctuations.12 However, the studies do not reveal significant trends in job-finding rates, 

and data compiled by economists at the Federal Reserve Board of Governors indicates that, as a 

percentage of workers who separated from jobs for any reason, fewer people made direct job-tojob transitions in 2005 and the first half of 2006 than did so throughout the expansion of the 

1990s.13

10 The temporary-help industry was redefined after the conversion to the North American Industry 

Classification System; with the new definition, its share is lower than previously reported. For the period (1990–

2002) in which we have overlapping data based on both the old and new definitions, the trends are largely similar. 11 See Peter Kuhn and Mikal Skuterud, “Does Internet Job Search Reduce Unemployed Workers’ Jobless 

Duration?” (Society of Labor Economists conference, Austin, Tex., April 2001); Kuhn and Skuterud, “Internet Job 

Search and Unemployment Durations,” American Economic Review, vol. 94, no. 1 (March 2004), pp. 218–232. 12 See Robert E. Hall, “Job Loss, Job Finding, and Unemployment in the U.S. Economy over the Past Fifty 

Years,” in Mark Gertler and Kenneth Rogoff, eds., NBER Macroeconomics Annual 2005 (Cambridge, Mass.: MIT 

Press, 2006), pp. 101–137; Robert Shimer, “The Cyclicality of Hires, Separations, and Job-to-Job Transitions,” 

Federal Reserve Bank of St. Louis Review (July–August 2005), pp. 493–507; Eva Nagypal, “Worker Reallocation 

over the Business Cycle: The Importance of Job-to-Job Transitions” (Evanston, Ill.: Northwestern University, 2004.) 

For a somewhat different view, see Michael W. Elsby, Ryan Michaels, and Gary Solon, The Ins and Outs of Cyclical 

Unemployment, Working Paper 12853 (Cambridge, Mass.: National Bureau of Economic Research, January 2007). 13 Bruce Fallick and Charles A. Fleischman, Employer-to-Employer Flows in the U.S. Labor Market: The 

Complete Picture of Gross Worker Flows, Finance and Economics Discussion Series 2004-34 (Federal Reserve 

Board of Governors, June 2004). Data updated to June 2006 are available online: 

www.federalreserve.gov/pubs/feds/2004/200434/feds200434.xls. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 13 

 

Overall Results: Evidence from the Beveridge Curve

Aggregate (economywide) changes in the relationship between vacancies and unemployment 

suggest that, on the whole, the efficiency of the labor market may have increased over the past 

20 years. That relationship—known as the Beveridge curve—indicates that when labor markets 

are tight, vacancies rise and unemployment falls; the reverse is true in a slack labor market.14 

Past analysis revealed a persistent outward shift in the Beveridge curve between the 1960s and 

early 1980s.15 For any given number of vacancies, therefore, the number of unemployed people 

was higher. The shift was attributed mostly to growing geographic disparities in economic 

conditions. More recently, Robert Valletta showed that the Beveridge curve has shifted inward 

since the late 1980s, exhibiting a reduced number of unemployed people at any given level of 

vacancies and fully offsetting the earlier outward shift (see Figure 7).16 This implies either that 

the job-searching process has indeed become more efficient over the past two decades or that the 

skills and other attributes of unemployed job seekers have become better matched with those 

sought by employers.17

To assess the quantitative impact of changes in the labor market, we used Valletta’s measure of 

the cumulative shift in the Beveridge curve (see Figure 8). That measure was incorporated into an 

Okun’s law regression, which relies on the historical relationship between the gross domestic 

product (GDP) gap—the difference between actual and potential GDP—and the unemployment 

14 See William Beveridge, Full Employment in a Free Society (London: George Allen and Unwin, 1944). 15 See Katherine G. Abraham, “Help Wanted Advertising, Vacancies, and Unemployment,” Brookings 

Papers on Economic Activity, vol. 1 (1987), pp. 207–248. 16 Robert G. Valletta, “Why Has the U.S. Beveridge Curve Shifted Back? New Evidence Using Regional 

Data,” Working Paper 2005-25 (Federal Reserve Bank of San Francisco, December 2005); Robert G. Valletta and 

Jaclyn Hodges, “Job Matching: Evidence from the Beveridge Curve,” Economic Letter 2006-08 (Federal Reserve 

Bank of San Francisco, April 21, 2006). 17 That measure is based on a regression in which the age-adjusted unemployment rate is a function the 

vacancy rate (and its square) and on a series of year dummies for 1977 to 2005. The vacancy rate was derived from 

the JOLTS data for 2001–2005 and for earlier years from the Conference Board’s “Help-Wanted Advertising Index,” 

which is compiled from a monthly survey of job advertisements in major newspapers. The year dummies can be 

interpreted as a proxy for the impact of overall labor market efficiency on the aggregate unemployment rate after 

considering aggregate demand and the demographic mix. A negative value means that, relative to the base year 

(1976), the labor market was more efficient, workers and jobs were better matched, or both. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 14 

Table 3.

Impact of Shift Variable on Unemployment Among Married Males, 1978 to 2005 

(1) (2) (3) 

Coefficient .267 .320 .280 

(t-statistic) (3.59) (2.98) (2.66) 

Adjusted R2 .975 .427 .460 

Impact 

1985 to 1998 −0.60 −0.71 −0.62 

1998 to 2005 −0.22 −0.26 −0.23 

1985 to 2005 −0.81 −0.97 −0.85 

Notes: Specification (1) used a regression analysis of the unemployment rate of married men on the gross domestic product (GDP)

gap (current and 8 lags) as well as the shift variable and is corrected for serial correlation. Specification (2) used a regression 

analysis of the first difference of the unemployment rate on the first differences in the shift and in the GDP gap. Specification (3) 

is identical to (2) except that it also includes an error correction term. 

rate for married men. The latter rate is largely invariant to changes in the composition of the labor 

force. Results are shown in Table 3 for three alternative specifications; in each case the impact on 

the unemployment rate of shifts in the Beveridge curve over any period is obtained by multiplying 

the change in the shift variable by the coefficient on that variable. The results imply that between 

1985 and 2005 the married male unemployment rate consistent with a given GDP gap declined by 

0.8 to 1.0 percentage points, with 0.2 to 0.3 points of that decline occurring after 1998. 

These results do not tell us exactly what caused the Beveridge curve to shift. We can, however, 

conclude that the natural rate has fallen significantly over the past two decades beyond the impact 

of shifts in the demographic mix. The results are broadly consistent with those of Lawrence Katz 

and Alan Krueger, who estimated that the natural unemployment rate fell by about a percentage 

point between the mid-1980s and the late 1990s (including 0.3 to 0.4 percentage points directly 

attributable to demographic shifts).18 The findings here suggest that it has fallen by another 0.4 to 

0.5 percentage points since then, reflecting continuing improvements in the efficiency of the labor 

market and the declining participation of teens and young adults in the labor force. 

 18 Katz and Krueger, “High-Pressure Labor Market of the 1990s.” That analysis influenced CBO’s decision 

to reduce its then-current estimate of the natural rate from 5.5 percent to 5.2 percent in its January 2000 forecast. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 15 

Figure 7. 

U.S. Beveridge Curve, Adjusted 

(Vacancy rate) 

Source: Valletta, Why Has the U.S. Beveridge Curve Shifted Back? Fig. 6. 
The Natural Rate of Unemployment CBO Working Paper 2007-06 Page 16 

Figure 8. 

Labor Market Efficiency and Unemployment, 1976 to 2005

1976 1981 1986 1991 1996 2001

2

1

0

-1

-2

-3

Index

shift

Source: Congressional Budget Office based on data provided by Robert Valletta. 

Notes: Index (1976 = 0). The index records an estimate of shifts over time of the relationship between vacancies and (age 

adjusted) unemployment shown in Figure 7. A lower number corresponds to a leftward shift of the relationship and implies a 

lower unemployment rate for any given rate of vacancies. The shaded vertical bars indicate business-cycle recessions, as 

determined by the National Bureau of Economic Research.