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The NAIRU reconsidered: why labour market deregulation may raise unemployment

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  • Servaas Storm
  • C. W. M. Naastepad

Abstract

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by 'excessive' labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non-accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long-term effects. It follows that labour market deregulation does not necessarily reduce steady-inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady-inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984-1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).

Suggested Citation

  • Servaas Storm & C. W. M. Naastepad, 2008. "The NAIRU reconsidered: why labour market deregulation may raise unemployment," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(5), pages 527-544.
  • Handle: RePEc:taf:irapec:v:22:y:2008:i:5:p:527-544
    DOI: 10.1080/02692170802287490
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    References listed on IDEAS

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    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
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    Cited by:

    1. Lavoie, Marc. & Stockhammer, Engelbert., 2012. "Wage-led growth : concepts, theories and policies," ILO Working Papers 994709363402676, International Labour Organization.
    2. Sasaki, Hiroaki, 2012. "Is the long-run equilibrium wage-led or profit-led? A Kaleckian approach," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 231-244.

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