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The NAIRU determinants: What’s structural about unemployment in Europe?

Philipp Heimberger (), Jakob Kapeller () and Bernhard Schütz

Journal of Policy Modeling, 2017, vol. 39, issue 5, 883-908

Abstract: This paper analyzes the determinants of the European Commission’s estimates of the non-accelerating inflation rate of unemployment (NAIRU) for 14 European countries during 1985–2012. The NAIRU is a poor proxy for ‘structural unemployment’. Labor market institutions – employment protection legislation, union density, tax wedge, minimum wages – underperform in explaining the NAIRU, while cyclical variables – capital accumulation and boom-bust patterns in housing markets – play an important role. This finding is policy-relevant since the NAIRU is used to compute potential output and structural budget balances and, hence, has a direct impact on scope and evaluation of fiscal policies in Europe.

Keywords: Unemployment; Fiscal policy; Labor market institutions; Potential output; NAIRU (search for similar items in EconPapers)
JEL-codes: C54 E24 E62 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jpolmod.2017.04.003

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Handle: RePEc:eee:jpolmo:v:39:y:2017:i:5:p:883-908