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The NAIRU and the Extent of the Low-Pay Sector

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  • Marcel Garz

    ()
    (University of Hamburg)

Abstract

The creation of jobs in the low-pay sector is considered to be an approach to reduce unemployment, especially with respect to low-skilled workers. By now, the expansion of the German low-wage sector over the last 15 years is empirically confirmed, which indicates a successful implementation of corresponding recommendations from policy advisers. In order to evaluate the effects of an increasing low-wage sector on unemployment, the concept of the non-accelerating inflation rate of unemployment (NAIRU) is used. In a first step, the unobservable, exogenous NAIRU is estimated for Germany in a state space setting. In a second step, data from the German Socio-Economic Panel (SOEP) is used to calculate a time series of the extent of the low-pay sector. Finally, by treating the NAIRU as the dependent variable, the impact of the low-wage share is estimated within an error correction framework. According to the proponents of the low-pay expansion, there should be a negative relationship between the NAIRU and the share of the low-wage sector. This hypothesis is rejected empirically. Indeed, for the time after the German reunification, cointegration is found between both variables suggesting a slightly positive relationship.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 12-2010.

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Length: 34 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:imk:wpaper:12-2010

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Keywords: NAIRU; low-wage; Kalman filter; error correction; cointegration;

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Cited by:
  1. Marcel Garz & Artur Tarassow, . "Does an expanding low-pay sector decrease structural unemployment? Evidence from Germany," Macroeconomics and Finance Series 201104, Hamburg University, Department Wirtschaft und Politik.
  2. Valerija Botric, 2012. "NAIRU estimates for Croatia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 30(1), pages 163-180.

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