Will the (German) NAIRU Please Stand Up?

Abstract. This paper deals with a critical assessment of the ‘non‐accelerating inflation rate of unemployment’ (NAIRU) for Germany. There are quite a few obstacles to perceiving the NAIRU as an easy‐to‐use analytical instrument: the possibility of a non‐vertical Phillips curve, the occurrence of shocks and hysteresis effects, and the (mis‐)measurement of important variables, cointegration issues and a time variability of the NAIRU. A new attempt is made to estimate a NAIRU for Germany using direct measures of inflationary expectations. However, by any method, the NAIRU is very hard to determine and subject to considerable arbitrariness.     

The European Commission’s new NAIRU: Does it deliver?

The non-accelerating inflation rate of unemployment (NAIRU) is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates – in the case of Spain from 26.6% to 20.7% for 2015. To test the dependence of the new NAIRU on unemployment versus structural factors, we run counterfactual simulations applying 1SD shocks to actual unemployment and to the structural variable – real unit labour costs. We find that the NAIRU in its new specification is still largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures.     

Conflict, Effort and Capital Stock in UK Wage Determination

The paper is concerned with the determination of wages, unemployment and labour productivity in the UK. The theoretical model suggests that in addition to economic factors, historical and ideological elements play an important role in the determination of wages, unemployment and productivity. Particular emphasis is put on the capital shortage hypothesis. It is argued that capital scrapping in response to the two oil price shocks, combined with subsequent sluggish growth in capital, may be responsible for the rise of the NAIRU and the persistence of unemployment. The empirical analysis is concerned with testing the theoretical model, using quarterly data for the UK from 1966 until 1994. We use cointegration analysis for the determination of wages, unemployment and labour productivity. This revised version was published online in July 2006 with corrections to the Cover Date.     

Unemployment dynamics,wage flexibility,and the NAIRU in Austria

This paper presents some empirical evidence of an increase of distributional pressures in the Austrian economy as reflected in a rise of the NAIRU over the past fifteen years. Employing a simple macroeconomic model of wage-price formation we have been able to establish that both the increase in employers' contributions to social security and the rising share of longterm unemployment associated with higher overall unemployment have exerted pressure on real product wages and, thus, have pushed up the equilibrium rate of unemployment. Even if this latter persistence effect in unemployment is ignored for a moment, the Austrian NAIRU seems to have approximately doubled since 1973. It should be noted, however, that despite of having trended upwards the Austrian NAIRU still compares very favourably with that of most other OECD countries. The estimation results reveal an impressive amount of real wage flexibility putting Austria among the top league in Europe. In particular, this stems from the fact that real product wages seem to be easily adapted to external price shocks and productivity shocks.

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Zusammenfassung Die Arbeit untersucht die Entwicklung der NAIRU in österreich unter Verwendung eines makroökonomischen Lohn-Preisbildungsmodells. Die empirischen Ergebnisse zeigen auf, daß in den letzten zwei Jahrzehnten sowohl die Erhöhung von Sozialversicherungsbeiträgen als auch die steigende Langzeitarbeitslosigkeit zu einer Erhöhung der NAIRU geführt haben. Gleichwohl zeichnen sich die Lohn-Preisbildungsmechanismen in Österreich durch eine im internationalen Vergleich hohe Absorptionsfähigkeit von Import- bzw. Produktivitätsschocks aus.

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Paper presented at the 1989 Conference of the Confederation of European Economic Associations, Barcelona, 25–26 May, 1989. I am indebted to participants at this conference and at seminars at the Wirtschaftsuniversität and the Institute for Advanced Studies, and to two referees of this journal for their comments and criticisms.     

NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff

Meaningful estimates of the non‐accelerating inflation rate of unemployment (NAIRU) within a Phillips curve framework require an identified tradeoff between inflation and unemployment. However, observations of inflation and unemployment are equilibrium points giving rise to a simultaneity problem. We assess conventional identifying assumptions in the literature on the German NAIRU in a general bi‐variate equations system of inflation and unemplyoment. We use a data‐driven method for identification based on shifts in the relative volatility of shocks to unemployment and inflation to identify the tradeoff for Germany. Our results support models which estimate a contemporaneous effect of unemployment on inflation and those which model inflation and unemployment jointly.     

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.     

我国自然失业率的测量与解析——基于1978-2007年数据

通过分析自然失业率的三种数理模型,采用比较静态分析与计量统计检验的方法,发现纳入工资刚性的凯恩斯主义NAIRU模型更符合我国实际.利用这个模型,在放宽自然失业率恒定不变和阶段性变化假设的基础上,测量了1978-2007年我国各年的自然失业率.1978年以来,我国自然失业率总体呈现上升趋势,到2003年为一个极大点;2003-2007年自然失业率开始下降,分别为9.25%、9.09%、13.1%、10.9%、7.15%.另外,我国平均的名义工资刚性度和实际工资刚性度分别为0.873、0.221.在我国,技术进步对自然失业率是具有长期效应而不是短期效应.技术进步倾向于减少自然失业率,而这与Pissarides等人在美国的研究结论是相反的.     

The NAIRU and Classical Unemployment in the OECD Countries

Using panel data for the OECD countries over the period 1960–93 this paper estimates the NAIRU, tests the restrictions implied by the NAIRU and estimates the extent to which the NAIRU is able to explain the low frequency movements in unemployment. The results indicate that the long-run restrictions imposed on the NAIRU are not satisfied for many countries and that the NAIRU is unable to account for the low frequency movements in unemployment.     

Measuring the NAIRU �� A structural VAR approach

This paper calculates the NAIRU for the US in a framework that allows inflation and unemployment to be jointly endogenous. We define the NAIRU as being the component of actual unemployment that is uncorrelated with inflation in the long run. We use a structural VAR to estimate the NAIRU and core inflation simultaneously and with greater precision than most of the previous literature. Our results show that the NAIRU fell dramatically at the end of the 1990s from 6.7% before 1997 to 5.2% afterwards.     

A small New Keynesian state space model of the Australian economy

Using a small New Keynesian state space macroeconomic model, we apply maximum likelihood estimation and the Kalman filter to obtain joint estimates of the unobservable medium-run paths of potential output and its normal rate of growth, the NAIRU, the neutral real interest rate and the subjective discount factor for Australia from 1984Q1 to 2006Q4. Using the estimated model we obtain dynamic forecasts for output, unemployment, and inflation to compare with the actual data from 2007Q1 to 2008Q4. Combining the estimated model with a monetary policy rule, we examine impulse responses of inflation and the output and unemployment gaps to shocks associated with the global financial crisis of 2008.     

Demand shocks and productivity growth

This paper presents evidence on the relationship between cyclical shocks and productivity growth, for 20 2-digit SIC US manufacturing industries and a set of monetary policy, fiscal policy, and oil price shocks. The paper uses as a measure of productivity change a Solow residual corrected for a wide range of non-technological effects due to imperfect-competition, non-constant returns to scale, and cyclical utilization rates of capital and labor services. The empirical framework identifies policy shocks independently of productivity measurement issues via a two-step procedure. While the typical industry shows weak responses of productivity to the shocks considered, in some industries temporary contractionary policy shocks lead to increases in productivity. In addition, the results reveal that there are localized asymmetries, with contractionary policy shocks having larger productivity effects than their expansionary counterparts. The results support the thesis that job reallocation is an important channel linking contractionary policy shocks and productivity growth. These results support the pit-stop view of downturns.Received: April 200, Accepted: March 2005, António Gomes de Menezes: I thank participants at seminars at Boston College, University of Alberta and Simon Fraser University and two anonymous referees for helpful comments.     

Stability of M2 money demand function in industrial countries

In this article, we set out a model of labour productivity which distinguishes between shocks which change productivity permanently and shocks which have transient affects on productivity. We show that this model is a type of unobserved components model – a random walk with drift plus noise model. The advantage of this approach is that it provides a coherent framework to identify the deterministic trend growth component and also the productivity enhancing (or technology related) stochastic components. The model is applied to aggregate labour productivity in Australia and the time series of technology shocks extracted is used to shed some light on the contributions of policy reforms to productivity.     

PRODUCTIVITY OR UNEXPECTED DEMAND SHOCKS: WHAT DETERMINES FIRMS' INVESTMENT AND EXIT DECISIONS?

We investigate the roles played by unexpected demand shocks, besides productivity, on firms' capital investment and exit decisions. We propose a practical approach to recover unexpected firm‐level demand shocks using inventory data. The recognition of demand shocks and inventory also improves the productivity estimation. The empirical results indicate that although productivity and demand shocks are both significant factors determining firm behavior, the former is more dominant for investment decision and the latter is more salient for firm exit. These findings confirm that unexpected demand shocks, besides persistent productivity, are important factors when analyzing capital investment and firm exit decisions.     

ON THE SOURCES OF AGGREGATE FLUCTUATIONS IN EMERGING ECONOMIES

Recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions. We estimate a model that encompasses these two approaches, shedding light on their relative merits and on how financial frictions affect the transmission of shocks. The model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional (temporary) productivity shocks, whereas trend shocks play a minor role. A link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data.     

Product market competition and productivity shocks

I investigate the interaction effects of competition and productivity shocks on stocks’ earnings and returns. I find that the sensitivities of earnings and returns to productivity shocks are negatively associated with competition intensity. I also find that the excess returns of productivity shocks-sorted portfolios are lower when competition intensity is high, even after controlling for known return predictors. Overall, the empirical evidence shows firms are less exposed to productivity shocks when competition is high. As such, this study provides a possible mechanism through which the structure of product markets affects stock returns.     

MODELING INVESTMENT‐SECTOR EFFICIENCY SHOCKS: WHEN DOES DISAGGREGATION MATTER?

The most straightforward way to analyze investment‐sector productivity developments is to construct a two‐sector model with a sector‐specific productivity shock. An often used modeling shortcut accounts for such developments using a one‐sector model with shocks to the efficiency of investment in a capital accumulation equation. This shortcut is theoretically justified when some stringent conditions are satisfied. Using a two‐sector model, we consider the implications of relaxing several of the conditions that are at odds with the U.S. Input–Output Tables, including equal factor shares across sectors. The effects of productivity shocks to an investment‐producing sector of our two‐sector model differ from those of efficiency shocks to investment in a one‐sector model. Notably, expansionary productivity shocks boost consumption in every period, whereas expansionary efficiency shocks cause consumption to fall substantially for many periods.     

Do technology shocks lower hours worked? – Evidence from Japanese industry level data

We examine the response of productivity and hours worked to technology and nontechnology shocks using the Japan Industrial Productivity (JIP) Database. We find that, at the aggregate level, positive technology shocks increase hours worked both in the manufacturing and the nonmanufacturing sector, accounting for a large fraction in the variances of hours worked. At the two- and three-digit industry levels, in contrast, we find that the correlation between productivity and hours worked in response to sectoral technology shocks tends to be negative. Further, we find that neither aggregate nor sectoral technology shocks appear to be the dominant factor underlying fluctuations in hours worked at the disaggregate level. The productivity decline in response to nontechnology shocks is not related to a permanent change in the relative size of industries.     

Why Has Australian Wages Growth Been So Low? A Phillips Curve Perspective

Wages growth in Australia has recently been the lowest in two decades. One possible explanation is a decline in the non‐accelerating inflation rate of unemployment (NAIRU). We examine this hypothesis by estimating a wage Phillips curve including a time‐varying NAIRU. Our findings are: (i) the NAIRU has recently been around 5.5 per cent; (ii) our approach increases the precision of the NAIRU estimates; (iii) low inflation expectations have been an important contributing factor; and (iv) the long‐run annual wages growth is nearly 3 per cent. We also find that the underutilisation rate suggests greater slack exists, but is less useful in explaining wage developments.     

Identification and dimension of the NAIRU

In this paper, we have re-examined the identification of the NAIRU and presented a well-defined reduced form for analysing the equilibrium unemployment rate, using a cointegrated VAR model. We have stated that the NAIRU estimates using the conventional reduced form (or Phillips curve) models are misleading since the natural rate of unemployment cannot be considered as a fixed point calling for the ceteris paribus assumption for all the data involved. This implies that the NAIRU estimates are unable to provide valuable information on the labour market status.     

Market institutions,labor market dynamics,and productivity in Argentina during the 1990s

This paper addresses the effects of policy shocks and structural reforms on the dynamic behavior of manufacturing job flows and productivity in Argentina during the 1990s, and the contribution of job reallocation to productivity. The main findings are: (a) shocks to labor taxes have allocative effects, while financial shocks have aggregate effects; (b) import tariffs appear to protect obsolete jobs; (c) sectoral differences in labor intensity, openness, financial dependence and workers’ strength shape the responses to shocks; (d) intra‐ and inter‐sectoral reallocations contribute positively to productivity; and (e) trade liberalization and labor market flexibilization favor reallocation and creative destruction.