The long-run Phillips Curve (LRPC) shifts when the natural rate of unemployment changes. Since the LRPC is a vertical line drawn at the natural rate, anything that permanently raises or lowers that rate moves the entire curve left or right. The natural rate reflects structural and frictional unemployment in an economy, not the cyclical ups and downs of recessions and booms. So the factors that shift the LRPC are the ones that change how well the labor market matches workers to jobs on a permanent basis.
The Natural Rate and Why It Matters
The LRPC is vertical because, in the long run, unemployment settles at its natural rate regardless of the inflation rate. This natural rate isn’t zero. It includes people between jobs, people whose skills don’t match available positions, and people who face geographic or institutional barriers to employment. When economists say the LRPC “shifts,” they mean this baseline unemployment rate itself has moved. A rightward shift means the natural rate has increased (worse structural conditions). A leftward shift means it has decreased (better structural conditions).
Skills Mismatch and Technological Change
One of the most powerful forces shifting the LRPC is a mismatch between what workers can do and what employers need. When technology changes rapidly, entire categories of jobs can disappear while new ones emerge that require different training. Workers whose skills have become obsolete face prolonged unemployment, not because the economy is in recession, but because their qualifications no longer fit the available openings. The oil shocks of the 1970s, for example, accelerated a shift from manufacturing to services that permanently changed the skill and geographic map of labor demand in the United States, pushing the natural rate higher for years.
This kind of mismatch can be geographic as well. If growing industries are concentrated in certain cities while unemployed workers live elsewhere, the disconnect between labor supply and demand raises the natural rate and shifts the LRPC to the right.
Changes in Labor Force Demographics
The age and skill composition of the workforce directly affects where the LRPC sits. Older workers tend to have lower unemployment rates than younger ones, so as the share of older individuals in the labor force increases, the natural rate falls. Research on the U.S. labor market found that aging and shifts in job composition could lower the natural rate to around 4.4%, down from higher estimates in earlier decades. Baby boomers moving through the workforce over the past two decades contributed meaningfully to this decline.
The reverse is also true. A surge of younger, less experienced workers entering the labor force (as happened in the 1970s when baby boomers first entered the job market) pushes the natural rate up and shifts the LRPC to the right.
Government Policies: Taxes and Benefits
Tax and transfer policies shape work incentives in ways that affect the natural rate. Higher taxes on labor income can reduce the reward of working relative to not working, which at the margin discourages some people from seeking employment. Unemployment benefits, while essential for supporting people between jobs, also influence how long someone searches before accepting a new position. More generous or longer-lasting benefits tend to raise the reservation wage, meaning people hold out for higher-paying jobs, which can increase the average duration of unemployment.
Policies that go the other direction, like earned income tax credits that reward work or job training subsidies, can lower the natural rate by pulling more people into the labor force and improving their match with available positions. Any of these shifts in policy can permanently move the LRPC.
Job Search Technology and Matching Efficiency
How easily workers find suitable jobs matters enormously. In the standard economic model of job matching, steady-state unemployment depends on both the rate at which people lose jobs and the rate at which they find new ones. Anything that improves matching efficiency, like online job platforms, better career services, or reduced information barriers, lowers frictional unemployment and shifts the LRPC to the left.
The internet revolution in job searching is a good example. Before online job boards, workers relied on newspaper ads, word of mouth, and in-person visits. Digital platforms dramatically expanded the speed and geographic reach of job searches, which many economists believe contributed to lower natural unemployment rates in the late 1990s and 2000s.
Hysteresis: When Recessions Leave Permanent Scars
A deep or prolonged recession can actually shift the LRPC to the right through a process called hysteresis. Here’s the mechanism: when people remain unemployed for a long time, their skills deteriorate, their professional networks weaken, and employers begin to view them as lower-quality candidates. This stigma reduces their chances of being rehired long after the recession ends. During the Great Recession, long-term unemployment rose sharply, and the relationship between job vacancies and unemployment shifted outward, meaning that even as job openings recovered, unemployment stayed elevated.
In effect, what starts as cyclical unemployment (caused by a temporary downturn) becomes structural unemployment (a permanent feature of the labor market). The natural rate rises, and the LRPC shifts right. This is one reason policymakers worry about letting recessions drag on too long.
Supply Shocks and Inflation Expectations
While supply shocks and changes in inflation expectations are most often discussed as factors that shift the short-run Phillips Curve, they can also have lasting effects on the LRPC if they trigger permanent structural changes. The 1970s oil crises are the classic case: the supply shock itself caused stagflation (rising unemployment and inflation simultaneously), but it also set off industrial restructuring that changed the natural rate for years afterward.
Changes in inflation expectations work similarly. If workers and firms come to expect persistently higher inflation, wage-setting behavior shifts in ways that can affect equilibrium unemployment. However, this channel primarily operates through the short-run curve. The LRPC shifts only when these expectations lead to lasting changes in labor market structure or bargaining dynamics.
Summary of Directions
- Shifts the LRPC right (higher natural rate): skills mismatch, loss of major industries, influx of younger or less-skilled workers, more generous unemployment benefits, hysteresis from prolonged recessions, higher labor taxes that discourage work
- Shifts the LRPC left (lower natural rate): better job-matching technology, workforce training programs, an aging labor force, policies that incentivize work, reduced barriers to geographic mobility
The key test for whether something shifts the LRPC is whether it changes the economy’s structural employment picture on a permanent basis, not just during a business cycle.