Advanced Search
MyIDEAS: Login to save this paper or follow this series

The (Ir)relevance of the NRU for Policy Making: The Case of Denmark

Contents:

Author Info

  • Karanassou, Marika

    ()
    (Queen Mary, University of London)

  • Sala, Hector

    ()
    (Universitat Autònoma de Barcelona)

  • Salvador, Pablo F.

    ()
    (Universidad Nacional de Cuyo)

Abstract

We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.

Download Info

If 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.
File URL: http://ftp.iza.org/dp2397.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2397.

as in new window
Length: 24 pages
Date of creation: Oct 2006
Date of revision:
Publication status: published in: Scottish Journal of Political Economy, 2008, 55 (3), 369-392
Handle: RePEc:iza:izadps:dp2397

Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org

Order Information:
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Email:

Related research

Keywords: unemployment; frictional growth; chain reaction theory; labour market dynamics; natural rate of unemployment;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 10(03), pages 285-316, June.
  2. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," NBER Working Papers 8940, National Bureau of Economic Research, Inc.
  3. Marco Bianchi & Gylfi Zoega, 1996. "Unemployment persistence: Does the size of the shock matter?," Bank of England working papers, Bank of England 50, Bank of England.
  4. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(3), pages 55-74, Summer.
  5. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9514, Faculty of Economics, University of Cambridge.
  6. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(440), pages 178-91, January.
  7. Karanassou, Marika & Snower, Dennis J., 1997. "Is the natural rate a reference point?," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 559-569, April.
  8. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  9. Karanassou, Marika & Snower, Dennis J, 1998. "How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(448), pages 832-49, May.
  10. Fitoussi, J-P & Jestaz, D. & Phelps, E.S. & Zoega, G., 2000. "Roots of the Recent Recoveries : Labor Reforms or Private-Sector Forces ?," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2000-04, Observatoire Francais des Conjonctures Economiques (OFCE).
  11. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," IZA Discussion Papers 2265, Institute for the Study of Labor (IZA).
  12. Engelbert Stockhammer, 2003. "The Rise of European Unemployment: A Synopsis," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp76, Political Economy Research Institute, University of Massachusetts at Amherst.
  13. Nicoletta Batini & Jennifer V. Greenslade, 2006. "Measuring the UK short-run NAIRU," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 28-49, January.
  14. Odile Chagny & Matthieu Lemoine, 2004. "An estimation of the Euro Area potential output with a semi-structural multivariate Hodrick-Prescott filter," Sciences Po publications, Sciences Po 2004-14, Sciences Po.
  15. 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, Royal Economic Society, vol. 110(462), pages C1-33, March.
  16. Phelps, Edmund S & Zoega, Gylfi, 1998. "Natural-Rate Theory and OECD Unemployment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(448), pages 782-801, May.
  17. Westergaard-Nielsen, Niels, 2001. "Danish Labour Market Policy: Is it worth it?," CLS Working Papers, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research 01-10, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
  18. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
  19. Nymoen, Ragnar & Rodseth, Asbjorn, 2003. "Explaining unemployment: some lessons from Nordic wage formation," Labour Economics, Elsevier, Elsevier, vol. 10(1), pages 1-29, February.
  20. Holden, Steinar & Nymoen, Ragnar, 2002. " Measuring Structural Unemployment: NAWRU Estimates in the Nordic Countries," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 104(1), pages 87-104.
  21. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 21(45), pages 5-59, 01.
  22. Nickell, Stephen, 1998. "Unemployment: Questions and Some Answers," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(448), pages 802-16, May.
  23. James Tobin, 1997. "Supply Constraints on Employment and Output: NAIRU Versus Natural Rate," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1150, Cowles Foundation for Research in Economics, Yale University.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Kiel Working Papers, Kiel Institute for the World Economy 1350, Kiel Institute for the World Economy.
  2. Martin Leites & Sylvina Porras, 2013. "El enfoque de la Reacción en Cadena: una aplicación para explicar la dinámica del desempleo en Uruguay," Documentos de Trabajo (working papers), Instituto de Economía - IECON 13-11, Instituto de Economía - IECON.
  3. Marika Karanassou & Hector Sala & Dennis J. Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Discussion Papers, School of Economics, The University of New South Wales 2008-08, School of Economics, The University of New South Wales.
  4. Marika Karanassou & Hector Sala, 2008. "Productivity Growth and the Phillips Curve: A Reassessment of the US Experience," Discussion Papers, School of Economics, The University of New South Wales 2008-06, School of Economics, The University of New South Wales.
  5. Karanassou, Marika & Sala, Hector, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," IZA Discussion Papers 3712, Institute for the Study of Labor (IZA).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp2397. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.