Finance and Economics Discussion Series

An Evaluation of the Inflationary Pressure Associated with Short- and Long-term Unemployment

Michael T. Kiley
2014-28

Abstract: In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed. This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation. However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation. We present a model illustrating these issues and apply the model to data for U.S. metropolitan regions. We find that that short- and long-term unemployment exert equal downward pressure on price inflation.

Keywords: Short-term unemployment, phillips curve