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The equilibrium rate of unemployment : a theoretical discussion and an empirical evaluation for six OECD countries

Author

Listed:
  • Odile Chagny

    (Observatoire français des conjonctures économiques)

  • Frédéric Reynés

    (Observatoire français des conjonctures économiques)

  • Henri Sterdyniak

    (Observatoire français des conjonctures économiques)

Abstract

This paper examines theoretically and empirically the controversial notion of “equilibrium rate of unemployment” (ERU) which opposes proponents of the Phillips curve to those of the WS/PS models. Theoretically, this paper shows that the specification of the wage equation has a significant influence on the ERU. It also shows that an “asymmetric” wage-price setting using a Phillips curve and a price equation in level allows a clear distinction between the medium run ERU and the long run ERU that can be seen as a reconciliation between WS/PS models and the Phillips curve. Moreover, this paper calculates ERU for 6 OECD countries (the United States, Germany, France, the United Kingdom, Spain and the Netherlands) for the period 1970-late 1990’s by using a structural approach. As there are little studies that test directly the impact of institutional variables in a Phillips curve, the first empirical objective is to test this effect. The results in this matter are not really conclusive. The second objective is to calculate medium run and long run ERU. The evolutions of the medium run ERU explain relatively well those of the actual unemployment rate until the late eighties. Its determinants are the slowdown of productivity growth, the 2 oil shocks, the increase of employer’s social contribution and the change in the inflation target of the monetary authorities. In the nineties, the actual unemployment lies clearly above its equilibrium level suggesting that a big part of the European unemployment is due to an excess supply.

Suggested Citation

  • Odile Chagny & Frédéric Reynés & Henri Sterdyniak, 2002. "The equilibrium rate of unemployment : a theoretical discussion and an empirical evaluation for six OECD countries," Sciences Po publications n°2002-04, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/1905
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    Cited by:

    1. Eric Heyer & Frédéric Reynès & Henri Sterdyniak, 2004. "Observable and unobservable variables in the theory of the equilibrium rate of unemployment, a comparison between France and the United States," Working Papers hal-01027420, HAL.
    2. Antoine Bouveret & Bruno Ducoudre, 2007. "On the Contingency of Equilibrium Exchange Rates with Time - Consistent Economic Policies," SciencePo Working papers Main hal-01066080, HAL.
    3. repec:hal:spmain:info:hdl:2441/1904 is not listed on IDEAS
    4. Heyer, Eric & Reynes, Frederic & Sterdyniak, Henri, 2007. "Structural and reduced approaches of the equilibrium rate of unemployment, a comparison between France and the United States," Economic Modelling, Elsevier, vol. 24(1), pages 42-65, January.
    5. Aurélien Gaimon & Vincent Lapegue & Paola Veroni & Noé N'Semi & Frédéric Reynés & Maël Theulière, 2007. "Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoretical and empirical appraisal," SciencePo Working papers Main hal-03602950, HAL.
    6. Aurélien Gaimon & Vincent Lapegue & Paola Veroni & Noé N'Semi & Frédéric Reynés & Maël Theulière, 2007. "Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoretical and empirical appraisal," Sciences Po publications 2007-34, Sciences Po.
    7. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    8. Aurélien Gaimon & Vincent Lapegue & Noé N'Semi & Frédéric Reynés & Maël Theulière & Paola Veroni, 2008. "Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoritical and empirical appraisal," SciencePo Working papers Main hal-03602948, HAL.
    9. repec:hal:spmain:info:hdl:2441/6120 is not listed on IDEAS
    10. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    11. repec:hal:wpspec:info:hdl:2441/1904 is not listed on IDEAS
    12. Alistair Dieppe & Jerome Henry & Peter Mc Adam, "undated". "Labour market dynamics in the euro area: A model-based sensitivity analysis," Modeling, Computing, and Mastering Complexity 2003 09, Society for Computational Economics.
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    14. Aurélien Gaimon & Vincent Lapegue & Paola Veroni & Noé N'Semi & Frédéric Reynés & Maël Theulière, 2007. "Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoretical and empirical appraisal," Working Papers hal-03602950, HAL.
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    16. Aurélien Gaimon & Vincent Lapegue & Noé N'Semi & Frédéric Reynés & Maël Theulière & Paola Veroni, 2008. "Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoritical and empirical appraisal," Post-Print hal-03602948, HAL.

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    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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