New estimates of Phillips curves and structural unemployment in the euro area

The Phillips curve can be used to estimate the non-cyclical part of unemployment. In such models, this estimate is commonly referred to as the ënon-accelerating wage rate of unemploymentí (NAWRU).(16) The Phillips curve can be specified in various ways, reflecting different assumptions regarding the formation of expectations. DG ECFIN has recently extended its framework to cover rational expectations. This section looks at the sensitivity of the results to alternative expectation assumptions, reporting NAWRU estimates based on Phillips curves produced using rational expectations and those (as used to date) allowing only for static or adaptive expectations. Our findings show that, for the euro area as a whole, the alternative expectation assumptions yield similar NAWRU estimates. In particular, the NAWRU appears to have increased recently, suggesting a deterioration of labour market performance beyond what could be considered merely cyclical. For Spain, however, the results vary more depending on the assumptions used. The Phillips curve based on rational expectations points to a more moderate NAWRU increase than that used by DG ECFIN to date. However, all estimates point to a substantial post-crisis increase in the NAWRU for Spain. In interpreting the rise in the NAWRU, it is important to bear in mind that both structural and non-structural factors are driving developments. Analysis shows that, in the presence of rigidities, crisis-related events can have temporary but long-lasting effects on labour market performance. Structural factors can play a role too, as illustrated by the steady decline in the NAWRU in Germany, which appears to be related to structural effects brought about by the Hartz reforms.