US unemployment, NAIRU and the “jobless recovery” in 2003-5

Question about US unemployment rate and the “jobless recovery” that followed 2003 peak? If you draw a line of NAIRU on the unemployment chart above, the unemployment rate only just peaks above it in 2003 so why are we all surprised that the rate of decline was so slow? Draw a line of the YoY growth of average weekly wage and you see that when the unemployment rate falls below NAIRU the average hourly wage growth (YoY) tends to trough at each instance of this since 1980 and begin to grow a gain as perhaps you’d expect. This suggests that when unemployment falls below NAIRU workers have more bargaining power in terms of wages at this point and so this is more likely to be why the unemployment rate fell less rapidly. If you take this further back beyond 1980, this relationship breaks down so the relationship ties in with the labour market reforms of the Reagan years in terms of reducing collective bargaining power. So when unemployment is below NAIRU it appears that workers have more power in wage negotiations, but above NAIRU employers have the upper hand.

US Average hourly earnings growth, unemp, NAIRU

 

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