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

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  • 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.

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Bibliographic Info

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

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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

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

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  1. Nymoen, Ragnar & Rodseth, Asbjorn, 2003. "Explaining unemployment: some lessons from Nordic wage formation," Labour Economics, Elsevier, vol. 10(1), pages 1-29, February.
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  5. Odile Chagny & Matthieu Lemoine, 2004. "An estimation of the euro area potential output with a semi-structural multivariate Hodrick-Prescott filter," Documents de Travail de l'OFCE 2004-14, Observatoire Francais des Conjonctures Economiques (OFCE).
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  17. Nickell, Stephen, 1998. "Unemployment: Questions and Some Answers," Economic Journal, Royal Economic Society, vol. 108(448), pages 802-16, May.
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  19. Nicoletta Batini & Jennifer Greenslade, 2003. "Measuring The UK Short-Run NAIRU," Discussion Papers 12, Monetary Policy Committee Unit, Bank of England.
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Cited by:
  1. Marika Karanassou & Hector Sala, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," Working Papers 633, Queen Mary, University of London, School of Economics and Finance.
  2. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Working Papers 604, Queen Mary, University of London, School of Economics and Finance.
  3. 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) 13-11, Instituto de Economía - IECON.
  4. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
  5. Marika Karanassou & Hector Sala, 2008. "Productivity Growth and the Phillips Curve: A Reassessment of the US Experience," Discussion Papers 2008-06, School of Economics, The University of New South Wales.

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