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Blanchard, O. and Katz, L., 1999, “What We Know and Do Not Know About the Natural Rate of Unemployment,” Journal of Economic Perspectives.
Boone, L., Julliard M., Laxton, D., and N’Diaye, P., 2002, “How Well Do Alternative Time-Varying Parameter Models of the NAIRU Help Policymakers Forecast Unemployment and Inflation in the OECD Countries?” IMF mimeo (available upon request)
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APPENDIX I Data Sources and Definitions
Unemployment Rate is the standardized unemployment rate (OECD Analytical Database).
Benefit Replacement Rate. The data refers to the first year of unemployment benefits as a percentage of average earnings before tax. The rate is averaged over two earnings levels, three family situations and three durations of unemployment. For further details, see the OECD Jobs Study (1994). The OECD publishes this measure once every two years. The intermediate years are interpolated.
Bargaining Coordination. This is an index between 1 and 3, increasing in the degree of coordination in the wage bargaining process on the employers’ as well as on the unions’ side. Constructed by Nickell and Nunziata and available in their labor market institutions database at http://cep.lse.ac.uk/pubs.
Union Density. The ratio of union members to the labor force. The data from 1960 to 1995 is taken from the Nickell and Nunziata database. The data after 1995 is from the OECD and can be found at http://www1.oecd.org/scripts/cde/members/lfsindicatorsauthenticate.asp.
Tax Wedge. For 1979–2002 the tax wedge is estimated by the OECD as the sum of income taxes plus employee social security contributions less cash benefits as percentage of labor costs for the average production worker. This data is available once every two years and the remaining years are interpolated. The data for the tax wedge prior to 1979 is from Nickell and Nunziata (2001).
Enforcement is a dummy variable which takes a value of 1 starting in 1998 (when interviews for the unemployed were conducted for the first time).
Real Interest Rate. The long-term rate on government bonds deflated by the GDP deflator (OECD Analytical Database).
Labor Productivity Growth is calculated at the growth of real GDP per hour worked. Source of average hours worked per person: OECD.
Prepared by Dora Iakova, ext. 35365.
The ratio of the variance of the gap to the variance of changes in the NAIRU is set at five in the estimation shown. Varying this parameter within the limits suggested by Boone et al. gives a range of 35 to 50 percent of the decline in unemployment explained by cyclical conditions. Given the uncertainty in choosing the appropriate degree of smoothness of the estimated NAIRU, an alternative estimation of the cyclical part of the decline in unemployment is presented later as a robustness check. I am grateful to Papa N’Diaye for providing the computer code for the NAIRU estimation.
An inverted-U relationship between the degree of bargaining coordination and the level of unemployment is expected to hold. See Calmfors (1993) for an exposition of this theory and relevant empirical evidence.
Arpaia and Carone (2004) show that both perfect and imperfect competition models generally predict a negative impact of labor taxation on employment.
See Chapter IV in IMF Country Report No. 04/349 for a detailed discussion of the role of social partnership agreements.
The continuation of the rent supplement applies only to those taking up part time work or entering approved employment schemes, and to long-term unemployed accepting employment. These rules could create incentives for the short-term unemployed to keep their working hours low once they enter employment.
The unemployed receive benefits for 15 months and then continue to receive unemployment assistance (means-tested) indefinitely.
See Walsh (2003) for a discussion. Highly competitive product markets are expected to increase employment.
Unit root tests confirm that most variables are stationary. Two variables - the structural unemployment rate and the benefit replacement rate - fail the test for stationary at the usual significant levels, but since these variables are always between zero and one, they are included in levels.
Since the benefit replacement rate is measured as percent of gross wage, changes in the tax wedge would determine the net replacement rate, which could explain the relatively high elasticity of unemployment with respect to the tax wedge.