Structural Change Raises the Natural Rate
Automation and a skills mismatch raise structural unemployment, shifting the long-run and short-run Phillips curves right together.
Structural Change Raises the Natural Rate
Phillips CurveAutomation and a skills mismatch raise structural unemployment, shifting the long-run and short-run Phillips curves right together.
Start at the natural rate
The economy begins at the natural rate of unemployment, where the short-run Phillips curve crosses the vertical long-run Phillips curve. The LRPC is vertical because in the long run unemployment is pinned down by real forces in the labor market, not by how fast prices happen to be rising.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Structural Change Raises the Natural Rate, step by step
- 1
Start at the natural rate
The economy begins at the natural rate of unemployment, where the short-run Phillips curve crosses the vertical long-run Phillips curve. The LRPC is vertical because in the long run unemployment is pinned down by real forces in the labor market, not by how fast prices happen to be rising.
- 2
Automation strands a group of workers
A wave of automation eliminates a large set of routine jobs, and the workers who lose them do not have the skills that the growing industries are hiring for. Matching people to jobs now takes longer, so more people are unemployed even when the economy is running at full capacity. That is structural unemployment, and it is a component of the natural rate.
- 3
LRPC and SRPC both shift right
The long-run curve moves right because the natural rate itself is higher: the lowest unemployment rate the economy can sustain without accelerating inflation has gone up. The short-run curve moves up and to the right with it, because the SRPC is anchored to the LRPC at the point where actual inflation equals expected inflation. If only the long-run curve moved, the two would no longer meet at that anchor, and that cannot be where the economy rests.
- 4
The old target now costs inflation
Suppose policymakers keep aiming at the unemployment rate that used to be normal. That rate now sits to the LEFT of the new long-run curve, so reaching it means running the economy beyond what it can sustain. Actual inflation exceeds expected inflation, expectations adjust upward, and the short-run curve keeps shifting up and to the right. Chasing an out-of-date target buys accelerating inflation, not lasting jobs.
- 5
Only supply-side policy moves it back
Because the shift came from the structure of the labor market, only supply-side measures can undo it: retraining, better job matching, and fewer barriers to moving between occupations and places. Monetary and fiscal policy can move the economy along a short-run curve, but they cannot push the vertical long-run curve back to the left.
Where it ends up
A rise in the natural rate of unemployment shifts the long-run Phillips curve right and drags the short-run curve right with it, so the lowest sustainable unemployment rate is higher until the underlying labor-market structure changes, and demand-side policy cannot bring it back down.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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