The Effects of Education on the Natural Rate of Unemployment

By Albert E. DePrince, Jr. and Pamela D. Morris

Dr. Albert E. DePrince, Jr., joined Middle Tennessee State University (MTSU) in 1991 as professor of economics and finance. Prior to joining MTSU, he was with Marine Midland Bank in New York City from 1978 through 1991, serving as its chief economist. Previously, he was an economist with the Federal Reserve Bank of New York. In the forecasting area, he has been a participant in the Blue Chip Financial Forecast survey since its inception in 1981. He received a BA from Bucknell University, an MA from the University of Michigan, and a PhD from New York University.

Pamela D. Morris joined the faculty of Middle Tennessee State University in August 2007. She is presently assistant professor of economics and finance. Her teaching and research interests are monetary economics, corporate finance, and financial institutions and markets. She received a PhD from Middle Tennessee State University, and a BS and MS from Auburn University.

This study develops a natural unemployment rate based upon education attainment. Behind this natural rate are labor force participation rates that vary positively with education attainment; observed unemployment rates that are inversely related to education attainment; and deviations of the observed unemployment rate from this hypothesized natural rate that are related to several expectation-based variables. With a lower natural unemployment rate today compared with years past, results point to a number of education- based challenges that employers will face. Matching employer needs with education will become more complicated as both education and needs become more specialized. Global labor markets will play an increasing role both in terms of skills and cost considerations. Next, the retirement of the baby boom generation will pose a unique challenge. Aside from the challenge of finding replacements from a pool of new workers smaller than the pool of retiring workers, retirements will not be easily predictable, thanks to the elimination of the earnings penalty for social security benefits. Finally, as college degrees become more prevalent, postgraduate studies will likely rise in importance as a distinguishing feature among skills.

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JEL Code: J21