Download Equilibrium unemployment

Equilibrium unemployment
Unemployment and stability
Albert van der Horst
CPB, The Hague
October 29, 2003
Equilibrium unemployment
Just a minute
 European comparative analysis
► EU
enlargement (immigration)
► Tax competition in the European Union
► Regional policy (geographical economics)
► European labor markets
► Competition and harmonization in Europe
(a Level Playing Field)
 Workshop
► Stability
and growth pact (January 9, 2004)
Equilibrium unemployment
Outline
 Equilibrium unemployment
► our
approach
► in Europe
► & structural growth
► versus the EC approach
► & stability and growth pact
Equilibrium unemployment
Stable?
Equilibrium unemployment
Equilibrium
 Equilibrium is central in
economic theory
► equilibrium
= where we go
► today = where we come from
 Unemployment is a persistent
phenomenon
► demand
= supply fails
► short-run imperfections are insufficient
► seems to be a stable equilibrium
Equilibrium unemployment
Equilibrium unemployment
Labor supply
W
Labor demand
-- u --
Wage curve
L
Equilibrium unemployment
Wage negotiations

Firms prefer low labor income share
►

Workers prefer high wage income
►

opt for low wages
take into account that unemployment leads to a
reduction in income
Negotiations
►
►
=> tax shifting & sharing
role of benefits (replacement rate)
w
l
wmin
ln  ln  1Tax   2 RR  3
  4u
p
y
w
Equilibrium unemployment
Wage equation
Tax
France
RR w(min)
Stationary
-0,79
yes
0
0,14
Germany
0,73
0
-2,10
yes
The Netherlands
0,13
0,75
-1,07
yes
Spain
0,21
-0,68
yes
United Kingdom
0,20
-0,79
yes
-0,40
no
United States
0
0,25
u(-1)
0,25
0,05
Equilibrium unemployment
Labor demand
 Firms maximize profits
Higher wages reduce profits
► Reduction in employment improves profits
►
 Substitution between labor and
capital
w
ln l  ln y   ln
p
Equilibrium unemployment
Equilibrium unemployment
 Equilibrium unemployment rate
depends on:
Tax wedge
► Benefits
► Minimum wage rate
► Interest rate
►
 pk  
1 
wmin
u

Tax   2 RR   3
 1    f   
1

 4 
w
p
y
 
Equilibrium unemployment
France and Germany
Equilibrium unemployment
The Netherlands and Spain
Equilibrium unemployment
United Kingdom
Equilibrium unemployment
Labor tax and unemployment
 Higher labor tax (1% GDP)
raises equilibrium unemployment immediately
► raises actual unemployment gradually
►
Jade simulation
Equilibrium unemployment
Labor tax and growth
 A tax increase
reduces structural GDP immediately
► reduces actual production gradually
► creates positive output gap (dotted line)
►
Jade simulation
Equilibrium unemployment
Structural growth
 Y* depends on
Labor supply
► Labor productivity
► Equilibrium unemployment
►
LS
CPB
EC
Projection
HP filter
Y/L HP filter
U*
HP filter
‘Equilibrium’ ‘NAIRU’
Equilibrium unemployment
EC Nairu
 Alternative approach by the
European Commission
► trend
estimate
► depend on change in inflation rate
► backward looking
Equilibrium unemployment
Labor tax and unemployment (2)
 Higher labor tax (1% GDP)
raises actual unemployment gradually
► raises equilibrium unemployment gradually, but
even before the implementation date
►
Equilibrium unemployment
Labor tax and growth (2)
 A tax increase
reduces structural GDP gradually
► reduces actual production gradually
► slightly positive output gap initially (dotted line)
►
Equilibrium unemployment
Meet the EMU-norm

What if a country proposes the EC to
improve its budget by raising its labor
tax rate (by 1% GDP)
Choice 1: does the EC take negative
growth effects into account?
If yes, how?


1)
Structural approach:
ΔEMU < 1% GDP
Positive output gap: ΔEMU(structural) < ΔEMU
2)
EC approach
ΔEMU < 1% GDP
Small output gap: ΔEMU(structural) ≈ ΔEMU
Equilibrium unemployment
Towards SGP
 The impact of tax changes
differ between countries
 It is therefore suboptimal to opt
for a single fiscal regime