Why was pre-Covid unemployment so low?

Here is a recent paper by Andreas Hornstein and Marianna Kudlyak, noting that when the authors write “current” they are (were) referring to pre-Covid times:

Current unemployment, as of 2019Q4, is so low not because of unusually high job finding rates out of unemployment, but because of unusually low entry rates into unemployment. The unusually low entry rates, both from employment and from out of the labor force, reflect a long-run downward trend, and have lowered the unemployment rate trend over the recent decade. In fact, the difference between the current unemployment rate and unemployment rates at the two previous cyclical peaks in 2000 and 2007 is more than fully accounted for by the decline in its trend. This suggests that the current low unemployment rate does not indicate a labor market that is tighter than in 2000 or 2007.

Of course these results have significance for the common view that we need to “run the labor market hot” to get back to a desirable state of affairs.  What we need is for the necessary adjustments to take place to restore a new and sustainable equilibrium.


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