US unemployment: Neither natural nor unnatural

Guillermo Calvo, Fabrizio Coricelli, Pablo Ottonello 24 July 2012



The Great Recession in the US has been followed by high and persistent unemployment. Although output recovered its pre-crisis level, the unemployment rate is still above its pre-crisis level, a situation that is popularly called ‘jobless recovery’ (see Figure 1).

Figure 1. US jobless recovery

Notes: GDP in real terms, peak = 100; unemployment rate in % seasonally adjusted figures.

Persistence of high unemployment is beginning to raise the suspicion in some quarters that the US economy is reaching the natural rate of unemployment (Weidner and Williams 2011 ). This would mean that further monetary expansion will yield higher inflation and virtually no cut in unemployment.

The evidence collected in our recent research suggests that this conclusion is premature (Calvo et al. 2012). As it turns out, the nature of the crisis affects the nature of the recovery.

Figure 2 shows that financial crises in advanced economies and ‘low-inflation’ emerging-market economies (EMs) display a degree of joblessness that clearly exceeds the levels reached during non-financial crises (measured at the point in time output per capita recovers its pre-crisis level). 

Financial crises carry the seeds of jobless recoveries

As we argue, following the disruption in credit markets typical of financial crises, collateral requirements drastically change and loans are biased towards projects and firms possessing easily recognisable collateral, associated with tangible assets, which can be defined as ‘intrinsic collateral’ (see Calvo 2011). Projects involving the creation of new jobs are generally cut off from financing, as they possess little ‘intrinsic’ collateral, and thus the recovery of output tends to be jobless.

However, this extra joblessness is not present in ‘high-inflation’ emerging market episodes. In those episodes, real wages bear the brunt of the adjustment and, even more remarkably, unemployment goes back to its pre-crisis level.1

This evidence could be construed to imply that inflation helps to accelerate the return to full employment. It should be noted, however, that in the average high-inflation emerging-market episode covered by our sample, inflation spiked up at the beginning of those episodes but later subsided, and did not result in permanently higher inflation. In other words, the empirical evidence does not bluntly contradict the existence of a long-run vertical Phillips curve around the pre-crisis rate of unemployment. But, it also suggests that a sharp dosage of price inflation for a limited period of time may go a long way to restoring full employment after financial crises, albeit at the cost of lower real wages.

We hasten to say, though, that these observations do not lead us to urge Mr Bernanke to take the high-inflation road.

  • Firstly, because he would probably lose his job and be replaced by a mindless hawk.
  • Secondly, and of greater substantive relevance, because a spike in dollar inflation could seriously jeopardise the credibility of the strongest global currency, a pivotal anchor of the world economy.
  • Thirdly, because inflation is not a regular tax; once the genie is out of the bottle it may take a life of its own (emerging markets offer plenty of examples for disbelievers).

Is there anything else the Fed can do?

Our short answer is: focus on liquidity and credit. Coordinate another large quantitative easing operation with the ECB in order to restore the stock of ‘safe assets’ (see Barclays Capital 2012, Gorton et al. 2012, IMF 2012), and help reactivate the credit market by speeding up bankruptcy procedures. Restoring safe assets is not inconsistent with expansionary monetary policy or high fiscal deficits (see Barclays Capital 2012), but it also includes structural reforms aimed at reestablishing credibility in capital markets.

All of these policies have to be conceived as part of a comprehensive plan to increase the flow and stock of safe assets, and not as a sneaky relabeling of conventional textbook stimulus packages. Hence, for credibility, this effort should involve tight coordination between the Fed and the Treasury, and must be accompanied by a very clear declaration that inflation will be fought tooth and nail.

Two additional points deserve being emphasised:

  1. Forget operation twist or the like, and focus on purchasing ‘toxic’ assets; and
  2. The ECB-Fed coordination should aim at avoiding large fluctuations in the euro/dollar exchange rate.

Point 1 reflects our conjecture that, under the current environment of low interest rates on US public debt, a swap between US liquid liabilities has no major effect on the stock of safe assets, a key lubricant of the credit channel. Point 2 reflects our conjecture that large exchange rate fluctuations will likely trigger beggar-my-neighbour policies and paralyse central banks' action and effectiveness.

If successful, this policy strategy will help to lift the cloud of ‘financial crisis’ from the current episode, and leave only factors that are common with run-of-the-mill recession episodes. Our paper suggests that this would clip around 2.5 points off the rate of unemployment, bringing it back close to the level prior to the start of the current crisis. Inflation need not rise since the world economy starts from a situation in which interest rates on safe assets are at rock bottom. And, if it does, the Fed and the ECB can easily stop it in its tracks by timely raising their policy interest rates in a coordinated fashion.

Figure 2. Financial crises, jobless and wageless recoveries


Barclays Capital (2012), Equity Gilt Study, Chapter 1.

Calvo, Guillermo, Fabrizio Coricelli, and Pablo Ottonello (2012), "The Labor Market Consequences of Financial Crises With or Without Inflation: Jobless and Wageless Recoveries".

Calvo, Guillermo (2011), “The Liquidity Approach to Bubbles, Crises, Jobless Recoveries, and Involuntary Unemployment", Working Paper.

Gorton, Gary, Stefan Lewellen, and Andrew Metrick (2012), “The Safe-Asset Share”, American Economic Review Papers and Proceedings, May, 101-106.

IMF (2012), "Safe Assets: Financial System Cornerstone?", Global Financial Stability Report: The Quest for Lasting Stability, Chapter 3, April.

Weidner, Justin and John C Williams (2011), “What Is the New Normal Unemployment Rate?”, Economic Letters, 14 February.

1 Low (high) inflation emerging market episodes are those during which inflation is lower (higher) than the median inflation in our sample of emerging market financial crises (34% annual rate).




Topics:  Global crisis Global economy Labour markets

Tags:  US, unemployment, jobless recovery, Great Recession

Professor of Economics, International and Public Affairs at Columbia University

Professor, University of Siena, Department of Political Science, Emeritus Professor Paris School of economics and Research Fellow, CEPR

PhD student in the Economics Department, Columbia University


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