Why is Unemployment so High At Full Capacity? The Persistence of Unemployment, the Natural Rate, and Potential Output in the Federal Republic of Germany

Thomas Krueger and David Coe ()

No 1990/101, IMF Working Papers from International Monetary Fund

Abstract: The empirical analysis indicates that in the Federal Republic the unemployed primarily influence the relationship between the level of real wages and productivity, rather than the growth of wages. This result suggests a distinction between an equilibrium natural rate of unemployment, which is estimated to have been 3-4 percent in the 1980s, and a quasi-equilibrium unemployment rate closer to actual rates of 7-8 percent. Corresponding to these two concepts of equilibrium unemployment, estimates are presented of alternative concepts of potential output that differ according to whether labor input is consistent with the quasi-equilibrium rate of unemployment or with the natural rate of unemployment.

Keywords: WP; Phillips curve; replacement ratio; inflation equation; estimation result; aggregate wage; wage inflation; wage determination; developments in the FRG; reservation wage; Unemployment rate; Potential output; Wages; Unemployment; Real wages (search for similar items in EconPapers)
Pages: 40
Date: 1990-10-01
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