I have shown before that the natural rate of unemployment has risen. Here is the graph plotting the unemployment rate against the UT index. The UT index tracks the position of the economy in the business cycle. When UT is close to 0%, the business cycle is at the end of its expansionary phase.
The graph implies that unemployment is decreasing toward a rate of 7.2% when the UT index reaches 0% (y-intercept). If the unemployment rate went to 6.5%, the UT index would have to go to -2.3%... a level it has not gone to since the inflationary period of the 1960's. It is very unlikely the UT index will go to -2.3% now.
In the graph above we can see that the trend of unemployment rose to a new level (yellow line). This occurred between 1stQ-2009 and 4thQ-2010. The following graph looks at that time period of the yellow line using the AS-ED model (aggregate supply-effective demand). (graph is based on quarterly data)
First look at the blue dots below which show real GDP increasing slowly at a low inflation rate. One would look at real GDP increasing and feel comforted that the economy is recovering. One might even see "green shoots" in the increase.
But then we look at the green dots which show a large drop of effective demand over the time period from 30% to 9%. This drop is primarily due to two factors, a decreasing labor share (77.7% to 74.3%) and an increasing capacity utilization (67.3% to 75.6%). Unemployment did not change much during the period (starting at 9.3%, rising to 9.9% and falling to 9.5%). Thus, we can say that capital utilization and capital income were favored in the bulk of the recovery.
It is important now to look at the red dots which show the crossing point of aggregate supply and effective demand. The crossing point establishes the LRAS curve (long-run aggregate supply). We see that the economy fell somewhat vertically down the LRAS curve and then reached a stabilization point from where it began to follow its current path until this day. (see red arrow following effective demand curve.)
So what happened? ... Unemployment did not participate in the decrease of effective demand. Unemployment got left behind. By the time effective demand leveled out into a normal business cycle, the unemployment rate was still sitting high at over 9%. Once the main drop in effective demand was over, unemployment would then start to decline at normal rates. Economists are still expecting unemployment decline at a faster rate, but that is not going to happen.
Currently the aggregate supply curve is shifting right as real GDP increases. The effective demand curve is not shifting; it is stable. The stability of the effective demand curve means there will not be an accelerated decline in the unemployment rate. Eventually real GDP will reach the crossing point of the aggregate supply curve and the effective demand curve. At this point, unemployment will stop decreasing. Unemployment will be around 7%.
If labor share was to rise, unemployment and capital utilization could increase further. However, it appears now that effective labor share is already on a trajectory to anchor in around 74% according the following graph. (see this link for explanation of graph) The green line shows the effective labor share anchor from 1975 to 2001. The blue line shows the effective labor share anchor has shifted to a new point since 3rdQ-2013... 73.4%.
An effective labor share of 74% makes it certain that unemployment will not go below 7.0% on a quarterly basis before the next recession. The implication is that unemployment has a new higher natural rate.