Abstract
This paper develops new measures of equilibrium unemployment for the United Kingdom, defined as the unemployment rate that would prevail once business cycle shocks have fully dissipated. Using the UK Labour Force Survey, we construct unemployment inflows and outflows across demographic groups defined by age and gender, capturing the movements of individuals into and out of unemployment. We then build a state-space model in which these demographic rates are observed and decomposed into (i) a cyclical component, (ii) a trend component, and (iii) an idiosyncratic component. We employ Bayesian methods to estimate the group-specific trends, modelled as latent states. Aggregating these flow rates yields an overall measure of the UK equilibrium unemployment rate. We estimate equilibrium unemployment at 5.5 % in the first quarter of 2025. Our results point to a significant downward trend beginning after the Global Financial Crisis, driven primarily by a fall in unemployment inflows among young adults (16–29), likely reflecting a shift from the labour market to higher education in the recession’s aftermath. Starting from the COVID-19 pandemic, however, equilibrium unemployment shows an upward trend, primarily explained by rising inflows into unemployment from inactivity among prime-age women following the pandemic. These findings highlight important secular shifts in the UK’s equilibrium unemployment dynamics. Crucially, this increase suggests a rise in the NAIRU, which may have actively contributed to the build-up of post-pandemic inflationary pressures.
Figure 2: The Equilibrium Unemployment
