The natural rate of unemployment and its institutional determinants

Atanas Hristov and Werner Roeger

Quarterly Report on the Euro Area (QREA), 2020, vol. 19, issue 1, 67-85

Abstract: This chapter explains movements in the natural rate of unemployment by considering both institutional labour market measures and persistent demand shocks. The study uses a panel data set for 28 EU countries covering 1985-2018. The following institutional variables are found to be key drivers of the natural rate: (i) a measure of the unemployment benefit replacement rate; (ii) a labour tax wedge indicator; and (iii) spending on active labour market policies. Additional elements that have a bearing on the natural rate include demographic factors associated with population ageing - have played a historical role, and persistent demand shocks. The latter developments are related to crisis episodes, such as the unwinding of unsustainable expansions in the housing market. The results suggest that, for a number of countries, the natural rates in 2018 were lower than during the previous business cycle peaks - for example, in 2000 or in 2007 - mainly because of changing demographics, rather than positive cyclical developments (the demand shocks).

Keywords: Euro area; natural rate of unemployment; structural tax reforms; labour tax wedge; econometrics; active labour market policies; demographics (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0191-04

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