The Phillips curve and long-term unemployment
AbstractThis paper studies the role of long-term unemployment in the determination of prices and wages. Labor market theories such as insider-outsider models predict that this type of unemployed are less relevant in the wage formation process than the newly unemployed. This paper looks for evidence of this behavior in a set of OECD countries. For this purpose, I propose a new specification of the Phillips Curve that contains different unemployment lengths in a time-varying NAIRU setting. This is done by constructing an index of unemployment that assigns different weights to the unemployed based on the length of their spell. The results show that unemployment duration matters in the determination of prices and wages, and that a smaller weight ought to be given to the long-term unemployed. This modified model has important implications for the policy maker: It produces more accurate forecasts of inflation and more precise estimates of the NAIRU.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 441.
Length: 47 pages
Date of creation: Feb 2005
Date of revision:
Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-FOR-2005-10-04 (Forecasting)
- NEP-LAB-2005-10-04 (Labour Economics)
- NEP-MAC-2005-10-04 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier J. Blanchard & Lawrence H. Summers, 1987.
"Hysteresis and the European Unemployment Problem,"
NBER Working Papers
1950, National Bureau of Economic Research, Inc.
- Laurence Ball & Robert Moffitt, 2001.
"Productivity Growth and the Phillips Curve,"
Economics Working Paper Archive
450, The Johns Hopkins University,Department of Economics.
- Blanchard, O.J. & Diamond, P., 1990.
"Ranking, Unemployment Duration, And Wages,"
546, Massachusetts Institute of Technology (MIT), Department of Economics.
- John T. Addison & Mário Centeno & Pedro Portugal, 2004.
"Reservation Wages, Search Duration, and Accepted Wages in Europe,"
w200413, Banco de Portugal, Economics and Research Department.
- Addison, John T. & Centeno, Mario & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute for the Study of Labor (IZA).
- Olivier Blanchard & Justin Wolfers, 1999.
"The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence,"
NBER Working Papers
7282, National Bureau of Economic Research, Inc.
- Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
- Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
- Laurence Ball & N. Gregory Mankiw, 2002.
"The NAIRU in Theory and Practice,"
Harvard Institute of Economic Research Working Papers
1963, Harvard - Institute of Economic Research.
- Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," NBER Working Papers 8940, National Bureau of Economic Research, Inc.
- Laurence Ball & N Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Economics Working Paper Archive 475, The Johns Hopkins University,Department of Economics.
- Acemoglu, Daron, 1995. "Public Policy in a Model of Long-Term Unemployment," Economica, London School of Economics and Political Science, vol. 62(246), pages 161-78, May.
- Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
- Blackaby, David H & Hunt, Lester C, 1992. "The "Wage Curve" and Long-term Unemployment: A Cautionary Note," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(4), pages 419-28, December.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Fed Watch: Rising NAIRU?
by Mark Thoma in Economist's View on 2010-07-27 07:33:00
- Rising NAIRU?
by Tim Duy in tim duy's fed watch on 2010-07-27 06:09:27
- Aleksejs Meļihovs & Anna Zasova, 2009.
"Assessment of the natural rate of unemployment and capacity utilisation in Latvia,"
Baltic Journal of Economics,
Baltic International Centre for Economic Policy Studies, vol. 9(2), pages 25-46, December.
- Aleksejs Melihovs & Anna Zasova, 2009. "The Assessment of Natural Rate of Unemployment and Capacity Utilisation in Latvia," Working Papers 2009/02, Latvijas Banka.
- Ekkehard Ernst & Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves," IMK Working Paper 04-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
- Christian Dreger & Hans-Eggert Reimers, 2009. "Hysteresis in the development of unemployment: the EU and US experience," Spanish Economic Review, Springer, vol. 11(4), pages 267-276, December.
- Mabrouk Chetouane & Matthieu Lemoine & Marie-Elisabeth de la Serve, 2011.
"Impact de la crise sur la croissance potentielle. Une approche par les modèles à composantes inobservables,"
Revue de l'OFCE,
Presses de Sciences-Po, vol. 0(1), pages 89-112.
- Chetouane, Mabrouk & Lemoine, Matthieu & De la Serve, Marie-Elisabeth, 2011. "Impact de la crise sur la croissance potentielle. Une approche par les modèles à composantes inobservables," Open Access publications from UniversitÃ© Paris-Dauphine urn:hdl:123456789/6706, Université Paris-Dauphine.
- Christophe Planas & Werner Roeger & Alessandro Rossi, 2003.
"How much has labour taxation contributed to European structural unemployment?,"
European Economy - Economic Papers
183, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
- Planas, Christophe & Roeger, Werner & Rossi, Alessandro, 2007. "How much has labour taxation contributed to European structural unemployment?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1359-1375, April.
- Christophe Planas & Werner Roeger & Alessandro Rossi, 2004. "How much has labour taxation contributed to European structural unemployment?," Econometrics 0408005, EconWPA.
- Konstantins Benkovskis & Dainis Stikuts, 2006. "Latvia's Macroeconomic Model," Working Papers 2006/02, Latvijas Banka.
- Lemoine, M. & de la Serve, M.E. & Chetouane, M., 2011. "Impact of the crisis on potential growth: An approach based on unobserved component models (in french)," Working papers 331, Banque de France.
- Aleksejs Melihovs & Anna Zasova, 2007. "Estimation of the Phillips Curve for Latvia," Working Papers 2007/03, Latvijas Banka.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).
If references are entirely missing, you can add them using this form.