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Do changes in structural factors explain movements in the equilibrium rate of unemployment?

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  • Vincenzo Cassino
  • Richard Thornton

Abstract

This paper examines the role played by various structural economic changes in explaining movements in the equilibrium rate of unemployment. The theoretical framework developed by Layard, Nickell and Jackman (LNJ) is employed to explain changes in the equilibrium unemployment rate. In the LNJ framework, equilibrium unemployment is determined by the interaction of the price and wage-setting behaviour of firms and workers. The natural rate is a function of structural variables such as the replacement ratio and union power that affect the size of firms and workers mark-ups. A wide range of equations with different combinations of structural variables is examined. It proves extremely difficult to find robust coefficient estimates that are statistically significant and have the expected signs on structural variables, unless a trended variable such as the owner-occupied housing rate is included. However, it is likely that these variables are simply capturing the upward trend in actual unemployment over most of the sample period in response to exogenous shocks. These results are found to be robust over different sample periods and different equation specifications. Therefore the results indicate that it is not possible accurately to explain movements in the natural rate using this approach, supporting the findings of other recent studies that suggest focusing on alternative, less structural, methods for estimating the equilibrium unemployment rate.

Suggested Citation

  • Vincenzo Cassino & Richard Thornton, 2002. "Do changes in structural factors explain movements in the equilibrium rate of unemployment?," Bank of England working papers 153, Bank of England.
  • Handle: RePEc:boe:boeewp:153
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    Cited by:

    1. Beissinger, Thomas, 2003. "Strukturelle Arbeitslosigkeit in Europa: Eine Bestandsaufnahme," University of Regensburg Working Papers in Business, Economics and Management Information Systems 389, University of Regensburg, Department of Economics.
    2. Charles St-Arnaud, 2004. "Une approche éclectique d'estimation du PIB potentiel pour le Royaume-Uni," Staff Working Papers 04-46, Bank of Canada.
    3. Rebecca L. Driver & Jennifer V. Greenslade & Richard G. Pierse, 2006. "Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(1), pages 45-79, February.
    4. Howell David R. & Baker Dean & Glyn Andrew & Schmitt John, 2007. "Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review of the Evidence," Capitalism and Society, De Gruyter, vol. 2(1), pages 1-73, May.
    5. Rebecca L Driver & Jennifer V Greenslade & Richard G Pierse, 2003. "The role of expectations in estimates of the NAIRU in the United States and the United Kingdom," Bank of England working papers 180, Bank of England.

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