Daniel Hall

1. Unemployment rates fell across OECD countries over the two decades before the Great Recession (2008-). To what factors do you attribute this fall? How far can your explanation also provide the basis for explaining observed patterns of unemployment rates across OECD countries since the on-set of the Great Recession?

In general we can say that the fall in unemployment across the OECD over the decades preceding 2008 has not been down to the use of any individual policy tools in isolation, but rather through a combination. Furthermore there has not been a specific combination of policy tools, which has proved successful in unemployment reduction across OECD countries in this period. The two decades prior to 2008 made it clear that there is not a ‘one size fits all’ combination of supply and demand side policies to reduce unemployment. Broadly speaking, supply side models for reducing unemployment can be divided into ‘Nordic’ (used by Sweden, Denmark, Austria and Australia among others) and ‘Anglo-Saxon’ (used by the Ireland, U.S.A and the U.K among others) (Coats, D. 2006, pp. 22-23). The Nordic model has focused on allowing large flows in and out of the unemployment pool, while providing high levels of support to the unemployed with an emphasis on collective wage bargaining and social dialogue. Policy in the Anglo-Saxon model has focused on combining low levels of welfare support, limited taxation, weak trade unions and low employment protection. It is also important to point out the following: unemployment has not fallen across all OECD countries over this period (See Appendix 1); also, although unemployment did fall across OECD countries between 1988 and 2008, for most, unemployment rose from 1988 into the early 90’s, continuing an upward trend in unemployment rates from the 70’s and 80’s, before beginning to fall. The upward trend in unemployment is generally accepted to have been caused by the oil price spikes in the 70’s1. The rise in unemployment was accompanied by These spikes in the price of oil were caused by the Arab oil embargo 1973, The Iranian revolution 1979 and the First Gulf War of 1980. 1
1

Daniel Hall rising inflation, with both persisting through the 70’s and into the 80’s and early 90’s. This ‘stagflation’ required policy makers to reconsider the original conception of the Phillips curve2, which implied a trade off between unemployment and inflation. Instead policies were implemented based around an expectations augmented Phillips curve3, where unemployment could not be sustained below a certain level without an increase in the inflation rate. This lead policy makers to look at supply side policy’s as a means of shifting the Phillips curve to the left, to decrease unemployment for a given inflation rate, in order to lower the nonaccelerating inflation rate of unemployment, the NAIRU, (Friedman, 1968). With this in mind the fall in actual unemployment across the OECD can be taken initially as a fall in the NAIRU, from the early 1990’s until 2000. From 2000 onwards as inflation remained stable, the actual unemployment rate is roughly equivalent to the natural rate4, with variation coming from cyclical demand side factors. (Blanchard, 2000) This is charted in Appendix 4.

The key recommendations made by the OECD in the early 1990’s (OECD, 1994) to reduce unemployment, serve as a good basis for examining which policy action we might attribute the fall in unemployment levels to5. I will primarily focus on those policy recommendations, which sought to increase the flexibility of the labour market as a way of reducing unemployment. A dual account of what it is for labour markets to be flexible is given by HMT (2003)6. Labour market flexibility is divided into two concepts. The first is the ability of the labour market to return to equilibrium following a disturbance, through adjustments in the wage, supply of labour and demand for labour. This concept of labour market flexibility For the derivation of the original Phillips curve see Appendix 2 For the derivation of the original Phillips curve see Appendix 3 4 Blanchard makes this assertion based on the assumption that when inflation increases, unemployment is below its natural rate and vice versa. When inflation is stable, unemployment is at its natural rate. 5 For the key recommendations see Appendix 5 6 It is important to note that many other definitions of what it is for a labour market to be ‘flexible’ have also been given. See Lagos, 1994; Pissarides, 1997; Forstater, 2000
3 2

2

Daniel Hall implies that a flexible labour market will rapidly reallocate labour, following a downturn in an industry, region or in a particular occupation to return the economy to equilibrium unemployment. The second concept of labour market flexibility describes the institutional determinants of the level of structural unemployment. Under this description of labour market flexibility, a flexible labour market implies one that has a low structural level of unemployment.

Policy’s aimed at reducing labour market rigidities as a means of reducing unemployment are broadly part of the ‘Anglo-Saxon’ model mentioned above. Policy’s that increase labour market flexibility may reduce the NAIRU, the structural level of unemployment at which inflation stabilises7. Theory suggests that a reduction in the factors that enable or encourage workers to increase their desired real wage for a given level of unemployment will cause a reduction in the NAIRU. All of these factors are captured by the parameter z in the wage setting relation. The wage setting relation gives real wage as a function of unemployment and z, a catchall variable, which stands for all of the factors which affect wages, given the expected price level and the unemployment rate (Blanchard, Amighini, Giavazzi, 2010). The wage setting relation: 𝑊 = 𝐹 𝑢, 𝑧 𝑃                           −, +

The natural rate of unemployment then, is where the wage setting relation is equal to the price setting relation. The price setting relation represents the limit to the real wage that the economy can provide, given the productivity of labour and the mark-up of prices over costs by firms in the economy.
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For a mathematical derivation of the NAIRU see Appendix 6 3

Daniel Hall The price setting relation: 𝑊 1 = 𝑃 1 + 𝜇 The NAIRU, then is given by the point at which real wage demands by workers are equal to the real wage firms are willing to pay: 𝐹 𝑢! , 𝑧 = 1 1 + 𝜇

Where Un represents the NAIRU. This implies that, given the mark-up, a reduction in any of the factors captured by z, will lead to a reduction in the NAIRU8. The OECD (1994) recommendations to increase the flexibility of labour markets then, were an attempt to reduce labour market distortions captured by z and reduce the NAIRU. The wage floors created by these distortions raise the cost of employment, and the consequences of this are particularly harmful for lower-productivity workers. Flexibility in the labour market, as defined by the OECD, lowers the cost of hiring these low skilled workers, enabling them to enter employment.

The United Kingdom and the U.S embody the policy recommendations of the OECD, operating highly flexible labour markets, and saw declining unemployment levels over the two decades prior to 20089. However evidence that these policies had any direct effect on unemployment rates over this period is not robust. Nickell (1998) argues that these policy changes cannot explain the reduction in time-series unemployment. He argues that although unemployment was much lower in the 1960’s than the 1990’s, the rigidity of the labour market institutions in the two periods were not much different. This idea is supported by

8 9

For a graphical representation of the wage and price setting relations see Appendix 7 For a graphical representation of U.K and U.S unemployment rates 1988-2008 see Appendix

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Daniel Hall
the di fferent the evolutions of a the five countries, the Blanchard & Wolfers (2000). Thestriking chartsare below show lack of clear trend in and either absence of

a common trend. Figure 9b provides a different and more relevant angle by the maximum rate over all categories for each country and replacement rates or employment showing protection in EU5replacement countries, including the UK that might be each subperiod. Again, no clear trend emerges. Clearly, some of the maximum
ment today and unemployment in the 1960s should be explained by much less replacement rates increased in the early 1980s, but they have declined since accountable for the changes in unemployment rates. This casts doubt on whether these “employment friendly” institutions than 40 years ago. And the then. first pass at the time series evolution of institutions, which I undertook with Justin Wolfers in

reforms are what 2000, was not very encouraging:

The indexes of employment have impacted on unemployment rates.protection

shown in Figure 10 were constructed

by combining two sources, the series constructed by Ed Lazear (1990) for the
Figure 9. Replacement rates, EU5 since 1960
a: Average
40
FRA ESP FRA ESP ESP FRA

period before 1985, and the indexes constructed by the OECD for the 1980s and the 1990s. Again, what is striking is the absence of a clear trend, and the heterogeneity of evolutions across countries.

30

DEU GBR FRA

DEU GBR FRA

DEU FRA

DEU FRA ESP GBR DEU DEU DEU

average 20

GBR ESP ESP ESP

GBR GBR ITA GBR

Figure 10. Employment protection index, EU5 since 1960
ESP ITA ITA ESP ITA ESP ITA ESP ITA ESP DEU ITA ESP DEU DEU FRA FRA FRA FRA

4

ITA ESP ITA FRA ESP DEU

10

DEU
ITA ITA ITA ITA ITA ITA

DEU

1960

1970

1980

1990

2000

b: Maximum
80
ESP ESP ESP ESP ESP FRA FRA FRA FRA FRA

Employment protection index 1 2 3

0

FRA

60

FRA ESP FRA

ITA ESP GBR

DEU FRA DEU FRA GBR GBR GBR GBR GBR GBR GBR GBR

maximum 40

DEU GBR

DEU

GBR DEU

GBR DEU

DEU

DEU DEU

GBR

20

GBR ITA ITA ITA ITA ITA ITA

GBR

0

0

1960

1970

1980

1990

2000

1960

1970

1980

1990

2000

Source: Blanchard and Wolfers (2000)

Both taken from Blanchard & Wolfers (2000).

Source: Blanchard and Wolfers (2000)

Figures 9 and 10 reproduces two of the time series we gave in A that paper, for more systematic construction of time varying measures by others (in particreplacement rates and for employment protection respectively, for each EU5 ular Michele Belot and Jan Van Ours (2001)) suggested roughly similar conclucountry, for each five-year period since 1960. The replacementsions. rates shown in data regressions of unemployment rates on institutions across 20 In panel Figure 9 were constructed from an OECD data set, which measured the ratio of pre-tax social insurance and social assistance benefits to the pre-tax wage, for various categories of unemployed workers, depending on income, family status,

countries since labour 1960, and allowing for country and time dummies, Many OECD countries did not operate under market conditions that might be none of the labor market institutions appeared significant.

described as flexible but still a reduction inparticular their unemployment and duration ofconventionally unemployment. Figure 9a gives an unweighted average of these saw In this context, one variable deserves mention because level it often comes replacement rates, the summary measure often used by the OECD. What is back in discussions. The “tax wedge,” i.e. the difference between take–home pay over the two decades prior to 2008. Denmark, Australia, Sweden and Austria did not put into
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practise the recommendations made by the OECD and saw a stable or falling level of unemployment. Unemployment rates in these countries were lower, or at least falling at a greater rate than the U.S through much of the time period in question10. These countries maintained high union density, and generous replacement ratios, in contrast to the OECD recommendations. This suggests that the labour market reforms that increase flexibility are not the only solution to the problem of unemployment, or indeed the most effective, as the For a graphical representation of the unemployment rates of these countries over this period see Appendix 9 5
10

Daniel Hall OECD Jobs Survey (OECD, 1994) suggests. Indeed, the OECD itself in its 2004 Employment Outlook (OECD, 2004 p.15) acknowledged “one of the challenges of reassessment would be to understand whether different reform ‘approaches’ are possible”.

The heterogeneity of labour market policy reform in the two decades prior to 2008, combined with the fact that many countries who reformed their labour markets did not see any reduction in unemployment, leads us to ask if any factor external to labour market reform lead to the decline in unemployment rates across OECD countries. Ball (1999) argues that the determinants of aggregate demand have a greater long run effect on the NAIRU than is conventionally considered. Ball’s theory is based around the concept of hysteresis,11 where, as demand-side factors pull unemployment away from the NAIRU, the NAIRU itself is changed. This means that a rise in unemployment caused by demand deficiency will actually raise the long-term structural unemployment rate of the economy. Ball argues that OECD countries that maintained disinflationary monetary policy (initially used to counter the inflationary pressure of oil spikes in the 70’s) during the recession of the 80’s permanently increased the NAIRU. Ball thus advocates active demand management strategies during a recessionary period. More importantly to the analysis of what caused unemployment rates to fall across the OECD countries, Ball argues that hysteresis is symmetric: that expansionary demand policy’s can help to permanently reduce unemployment. This is supported by the change in unemployment rates over time in what Ball calls the ‘success’ and ‘failure’ countries12. The chart below shows changes in the NAIRU of 10 OECD countries between 1985 and 1997.

A term first used by Blanchard and Summers (1986) Ball’s success countries include Ireland, Netherlands, Portugal, U.K. and also Denmark if you extend his analysis to 1999. His failure countries include Canada, Belgium, France, Italy and Spain
12

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Daniel Hall

Taken from Ball (1999) p.213 Fig. 7 Ball argues that the successful countries were successful due to a combination of nonmonetary demand shocks overheating the economy and also due to limited use of contractionary policy to slow down inflation during strong periods of output growth. This is in contrast to the failure countries, which used excessively contractionary monetary policy, which generally did not ease during recessionary periods, leading to hysteresis. Ball is not suggesting that the reform of labour market institutions played no role in the reduction in unemployment rates over time, but simply that it is exaggerated and does more to explain cross-country differences rather than time series.

Given their usefulness in explaining cross-country unemployment rates (Nickell 1998), labour market institutions may provide an explanation to why unemployment rates across OECD

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Daniel Hall countries were affected differently by the Great Recession of 200813. The comparison of peak to trough changes in unemployment and the decline in output across OECD countries shows no correlation.
Change  in  OECD  harmonised  unemployment  rates  as  a   percentage  of  labour  force,  December  2007  to  March  2010  (%)  

12   10   8   6   4   2   0   -­‐2   ISL   TUR   IRL*   MEX   JPN   LUX   SWE   DNK   HUN   SVK   ITA   DEU   GBR   NLD   CZE   AUT   KOR   ESP   BEL   FRA   USA   CAN   GRC   NOR   CHE   NZL   POL*   AUS  

Source: OECD Economic Outlook Database 2010

For the  differences  the  impact  of  the  recession  had  on  real  G.D.P  in  comparison  to  its  affect  on   unemployment  see  Appendix  10 8

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Daniel Hall

2   0   -­‐2   -­‐4   -­‐6   -­‐8   -­‐10   -­‐12   -­‐14   -­‐16  

 Peak  to  Trough  Change  in  Outpur  in  the  2008-­‐09  recession  (%)  

Source: OECD Economic Outlook Database 2010 Okun’s law relates the degree to which the unemployment rate is affected by a deviation in output growth from its normal rate by a factor β. Okun’s law: 𝑢! − 𝑢!!! = −𝛽 𝑔!" − 𝑔! Where 𝑔! is the normal rate of output growth (Blanchard, Amighini, Giavazzi, 2010). Here labour market institutions affect the parameter 𝛽 across countries, and therefore the elasticity of unemployment with respect to changes in output. The IMF (2010) described the theoretical impact labour market institutions may have on the parameter 𝛽 in Okun’s law. High levels of EPL14, the prevalence of temporary contracts and the replacement ratio in particular are regarded as having a significant impact on the elasticity of unemployment in response to a recession.

Nordic countries have experienced increases in both inflows and outflows of unemployment, which Arpaia, A & Curci, N (2010) suggest may be due to relatively low levels of EPL
14

Employment Protection Legislation, see Appendix 11 for the OECD’s index of employment protection legislation. 9

Daniel Hall combined with an emphasis in ALMP’s15. Spain and Ireland on the other hand are experiencing strong inflows into unemployment. The high level of labor shedding in Spain is attributed to the prevalence of short term working contracts (IMF, 2008 pp. 8-12). German unemployment has not changed much since the onset of the Great Recession, which Burda, M. and Hunt (2011) among others, believe is due to the introduction of subsidized short-term working hours.

The general fall in unemployment levels in the two decades prior to 2008, is most likely due to a combination of the introduction of more flexible labour market policy’s and growth, leading to the reversal of unemployment hysteresis from the 1970’s. This period however, has challenged the convention that minimal government intervention is the key to a successful labor market, with many of the Nordic countries standing in stark contrast to this conventional wisdom.

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Active Labor Market Policy’s 10

Daniel Hall Bibliography • Ball, L., (1999) Aggregate Demand and Long-Run Unemployment, Brookings Papers on Economic Activity, Vol. 1999, No. 2. (1999), pp. 189-251 • Blanchard, O. (2005) European Unemployment: The Evolution of Facts and Ideas, National Bureau of Economic Research, Working Paper 11750, www.nber.org/papers/w11750 • Blanchard, O., Amighini, A., Giavazzi, F., (2010) Macroeconomics – A European Perspective, Prentice Hall, Essex • Blanchard, O., Summers, L. (1986) Hysteresis and the European Unemployment Problem, NBER Macroeconomics Economics Annual, edited by Stanley Fischer, 1: 15-78 • Blanchard, O., Wolfers, J., (2000) Shocks and Institutions and the Rise of European Unemployment. The Aggregate Evidence. Economic Journal, 110 (1): 1-33, March 2000. • • Coats, D. (2006) Who’s Afraid of Labour Market Flexibility? The Work Foundation Forstater, M. (2000) ‘Full Employment and Economic Flexibility’, Economic and Labour Relations Review 11(0) Supplement, pp. 69-88. • Friedman, M., (1968) The Role of Monetary Policy, American Economic Review, Vol. 58, No. 1 • • • Griffiths, A., Wall, S. (2007) Applied Economics, 11th Ed, Prentice Hall, Essex HMT (2003) EMU and Labour Market Flexibility, HMT, London Lagos, R.A. (1994) ‘Labour Market Flexibility: What Does it Really Mean?’, Cepal Review 54, (December), pp. 81-95. • Nickell, S. (1998) Unemployment: questions and some answers, Economic Journal, 108, 48, May. 11

Daniel Hall • • OECD (1994) Jobs Study: facts, analysis and strategies, OECD, Paris OECD (1998) Jobs Strategy: Progress Report, OECD Working Paper, No.196, OECD, Paris • • OECD, (2004) Employment Outlook, OECD, Paris Pissarides, C.A. (1997) ‘The Need for Labor-Market Flexibility in European Economic and Monetary Union’, Swedish Economic Policy Review. 4, pp. 513-546. • Schmitt, J., Wadsworth, J. (2005). U.S. and U.K. Labor Market Success in the 1990s. In: Howell, D., 2005. Fighting Unemployment: The Limits of Free Market Orthodoxy, Oxford University Press, Oxford • Arpaia, A., Curci, N., (2010) EU Labour Market Behaviour During the Great Recession, European Economy Economic Papers. No. 405. Available at http://ec.europa.eu/economy_finance/publications/economic_paper/2010/ecp4 05_en.htm • IMF. (2010) World Economic Outlook: Rebalancing Growth, Washington DC: International Monetary Fund, chapter 3. Available at: http://www.imf.org/external/pubs/ft/weo/2010/01/ • Burda, M. and Hunt, J. (2011) ‘What Explains the German Labor Market Miracle in the Great Recession?’ Brookings Papers on Economic Activity, No. 1, pp. 273-319.

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Daniel Hall Appendix Appendix 1:
Dataset: Labour Force Statistics (MEI)
Time Country Australia Austria Belgium Canada Chile Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom United States Euro area (17 countries) European Union (27 countries) Legend: B: E: Break Estimated value 1988 1993 1998 2003 2008 2009 2010 2011

i i i i i i i i i i i i i i i i i i i

7.2 3.6 .. 7.8 9.8 .. 6.5 .. 4.2 .. 5.9 7.7 .. .. 16.2 .. 12 2.5 .. .. 3.6 5.1 5.7 3.2 .. 5.7 .. .. 19.2 1.8 0.6 8.4 8.6 5.5 .. ..

10.9 4.2 8.1 11.4 6.5 4.4 10.7 .. 16.3 .. 7.9 9.7 12.1 5.3 15.7 .. 9.7 2.5 2.9 .. 3.4 ..

7.7 4.2 9.3 8.3 6.4 6.5 5.4 9.2 11.4 .. 9.2 11.3 7.9 2.7 7.6 8.5 11.3 4.1 7 2.8 3.2 4.4 7.7 3.2 10.6 4.9 12.6 .. 18.6 6.5 3.3 6.9 6.3 4.5 10.1 10.2

5.9 4.3 8.2 7.6 9.5 7.8 5.4 10 9 8.5 9.6 9.8 5.9 3.4 4.8 10.7 8.5 5.3 3.6 3.7 3.4 3.7 4.8 4.5 19.7 6.3 17.6 6.7 11.5 4.9 3.9 10.5 5 6 8.9 9

4.2 3.8 7 6.1 7.8 4.4 3.4 5.5 6.4 7.4 7.5 7.7 7.8 3 6.1 6.1 6.7 4 3.2 5.1 4 2.8 4.2 2.6 7.1 7.6 9.5 4.4 11.3 6.2 3.2 11 5.7 5.8 7.5 7

5.6 4.8 7.9 8.3 10.8 6.7 6 13.8 8.2 9.1 7.8 9.5 10 7.2 11.8 7.5 7.8 5.1 3.7 5.2 5.5 3.5 6.1 3.2 8.2 9.5 12 5.9 18 8.3 4.1 14.1 7.6 9.3 9.5 9

5.2 4.4 8.3 8 8.2 7.3 7.5 16.9 8.4 9.4 7.1 12.6 11.2 7.5 13.7 6.6 8.4 5.1 3.7 4.4 5.3 4.5 6.5 3.6 9.6 10.8 14.4 7.3 20.1 8.4 4.2 12 7.9 9.6 10 9.6

5.1 4.2 7.2 7.5 7.1 6.7 7.6 12.5 7.8 9.3 6 17.7 10.9 7.1 14.4 5.6 8.4 4.6 3.4 4.9 5.2 4.5 6.5 3.3 9.6 12.7 13.5 8.2 21.6 7.5 3.8 9.8 8.1 9 10.1 9.6

i i i i i i i i i i i i

9.8 6 14 5.5 .. .. 22.6 8.2 3.6 8.9 10.4 6.9 10 ..

data extracted on 02 May 2012 11:08 UTC (GMT) from OECD.Stat

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Daniel Hall

Appendix 2: Deriving the original Phillips Curve The original Phillips curve is based on the assumption that on average inflation will be equal to 0 and therefore expected inflation is equal to 0. (1)
! 𝜋! =0

With the aggregate supply relation given in terms of the inflation rate as: (2)
! 𝜋! = 𝜋! + 𝜇 + 𝑧 − 𝛼𝑢!

Where the parameterα captures the strength of the effect of unemployment on the wage. Given expected inflation is equal to 0, (2) becomes: (3) 𝜋𝒕 = 𝜇 + 𝑧 − α𝑢! This negative relation between inflation and unemployment is the original Phillips Curve

Appendix 3: Deriving the Expectations-Augmented Phillips Curve The assumption that inflation will be 0 on average is relaxed and therefore expected inflation is given as: (4)
! 𝜋! = 𝜃𝜋!!!

If we substitute this into (2) we get: (5) 𝜋! = 𝜃𝜋!!! + 𝜇 + 𝑧 − 𝛼𝑢! In the expectations augmented Phillips curve θ = 1 as the unemployment rate affects the change in the inflation rate. So the expectations augmented Phillips curve is given as: (6) 𝜋! − 𝜋!!! = 𝜇 + 𝑧 − 𝛼𝑢!

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that question is relatively straightforward: Since 2000, EU15 inflation has been indeed roughly constant—around 2% using the CPI index. If we take a stable inflation rate to be an indication that unemployment is roughly at the natural

Daniel Hall rate, this suggests that, today, the EU15 actual unemployment rate is close to
the natural rate.2 It follows that the increase in the actual unemployment rate since 1970 reflects, for the most part, an increase in the natural rate. Appendix 4:

Figure 2. EU15 actual and constructed natural rate
10 2
1960

4

percent 6

8

1970

1980

1990

2000

actual

natural

Source: OECD database and text

Taken from Blanchard (2005)

Can one tell how the natural rate has increased over time? The answer to that question is obviously much harder. Despite its limits, I find the following exercise to be useful: If we are willing to assume that, when unemployment is below the

Appendix 5:

natural rate, inflation will tend to increase, and when unemployment is above the natural rate, inflation will tend to decrease, we can construct a series for the natural rate using the actual rate and the change in inflation. The results of

OECD Key Recommendations •return Set macroeconomics to encourage non-inflationary growth to the issue in thepolicy last section of the paper. • • • Enhance the creation and diffusion of technology Increase working time flexibility Encourage entrepreneurship and eliminate restrictions on the creation and expansion of enterprises. • Make wage and labour costs flexible and responsive to local conditions and skill levels, particularly for young workers. • • • Reform employment security provisions that inhibit recruitment Strengthen the emphasis on ‘active’ labour market policies. Improve the education and skills of the labour force
2. One may question however whether this relation holds at very low rates of inflation; I

4

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Daniel Hall • Reform ‘unemployment and related’ benefits and the tax system to improve the functioning of the job market, whilst not jeopardising society’s equity goals. • Enhance product market competition to reduce monopolistic tendencies and weaken insider-outsider mechanisms, thereby leading to a more dynamic economy

Appendix 6: Derivation of the NAIRU
! The NAIRU is the unemployment rate at which 𝜋! = 𝜋!

Substitute this into the AS relation, given in terms of inflation: (1)
! 𝜋! = 𝜋! + 𝜇 + 𝑧 − 𝛼𝑢!

to get: (2) 𝑢! = 𝜇 + 𝑧 𝛼

Where Un is the NAIRU. Substituting (2) into the Expectations Augmented Phillips Curve gives: 𝜋! − 𝜋!!! = 𝜇 + 𝑧 − 𝛼(𝑢! − 𝑢! )

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Daniel Hall Appendix 7:

Real Wage W/P

(W/P)*

PS

WS WS’

NAIRU’

NAIRU

Unemployment

1. Following a reduction in the replacement-ratio or duration of unemployment benefits captured by a fall in z, there is an inward shift of the wage setting relation curve from WS to WS’. The natural rate of unemployment is now found at the equilibrium between the price setting relation, PS, and the new wage setting relation WS’. There is a fall in the natural rate of unemployment of NAIRU – NAIRU’ 2. The same shift in the WS curve to WS’ would occur following a reduction in union power, a reduction on the tax placed on earnings and a reduction in the degree of employment protection as they lower the wage targeted by workers for a given level of unemployment.

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Unemployment  (%)   10   12   6   8   10   12   6   8   0   2   4  

Unemployment  (%)    

Daniel Hall

Appendix 9:

Appendix 8:

1988  

1989  

1990  

1991  

1992  

1993  

1994  

1995   Year  

1996  

1997  

Annual   Year  

1998  

1999  

2000  

2001  

Australia  

2002  

2003  

2004  

2005  

2006  

2007  

2008   United  States   Euro  area  (17   countries)  

0   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008  

2  

4  

Australia  

United  Kingdom  

United  States  

18

Unemployment  (%)   6   8   0   1   2   3   4   5   7   10   12   6   8   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   Year  

Unemployment  (%)  

Daniel Hall

0  

2  

4  

Year    

Austria  

Denmark    

1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008  

Austria  

Denmark  

United  States  

United  States  

19

Unemployment  (%)   6   8   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   Year     0   Sweden   1   2   3   4   5   7   9  

Daniel Hall

Sweden    

United  States  

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Daniel Hall Appendix 10:
    Cross-­‐country  differences  in  the  impact  of  the  recession  on  real  GDP  are  only  one  of  the  factors  determining  how   sharply  unemployment  rosea   Change in unemployment rates from peak to troughb No/small unemployment impact (Less than a 1.5 pp increase) Medium unemployment impact (At least a 1.5 pp increase but less than a 3.5 pp increase) New Zealand (H ) Large unemployment impact (At least a 3.5 pp increase)

No/small GDP shock (Less than a 3 pp decline)

Australia Norway Poland Switzerland Austria Belgium France Germany Italy Korea Netherlands Slovak Republic Japan Luxembourg

(X,S) (X) (X,S) (X,P,S) (X,P,S) (X) (X) (X,P) (X,P,S) (X,P)

Change in GDP from peak to troughb

Medium GDP shock (At least a 3 but less than a 7 pp decline)

Canada Czech Republic Greece Hungary Portugal United Kingdom

(X,L) (X,S) (L) (X) (X) (H)

Spain United States

(L,H) (H)

Large GDP Denmark (X,L,H,P) Iceland (L,P) shock Finland (X,P,S) Ireland (C,L,H) (At least a 7 Mexico (X) Sweden (X,L) Turkey (C,P,S) pp decline) pp: Percentage-point. a) Letters in parenthesis following countries names indicate that the recession has been characterised by: C: A decline of at least 1 percentage point in the share of construction in total value added; H: A decline of housing prices of at least ten percent; L: At least six quarters between the prior GDP peak and the trough; P: A decline of labour productivity of at least 5 percentage points; S: At least 1% of total employees participating in short-time work schemes during 2009; X: A decline in exports as a share of GDP of at least 5 percentage points. b) Peak and trough defined in terms of real quarterly GDP. Source: OECD calculations based on OECD Economic Outlook and OECD Quarterly National Accounts Databases and national sources.

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Daniel Hall Appendix 11:
OECD indicators on Employment Protection Version 2 - Last updated 24-09-2010

Employment protection in OECD and selected non-OECD countries, 2008* Scale from 0 (least restrictions) to 6 (most restrictions)

Australia Austria Belgium Brazil Canada Chile China Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland India Indonesia Ireland Israel Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Russian Federation Slovak Republic Slovenia South Africa Spain Sweden Switzerland Turkey

Protection of permanent workers against (individual) dismissal 1.37 2.19 1.94 1.49 1.17 2.59 3.31 3.00 1.53 2.27 2.38 2.60 2.85 2.28 1.82 2.12 3.65 4.29 1.67 2.19 1.69 2.05 2.29 2.68 2.25 2.73 1.54 2.20 2.01 3.51 2.79 2.45 2.98 1.91 2.38 2.72 1.19 2.48

Regulation on temporary forms of employment 0.79 2.29 2.67 3.96 0.22 2.04 2.21 1.71 1.79 2.17 2.17 3.75 1.96 3.54 2.08 1.54 2.67 2.96 0.71 1.58 2.54 1.50 2.08 3.92 4.00 1.42 1.08 3.00 2.33 2.54 0.79 1.17 2.50 0.58 3.83 0.71 1.50 4.88

Specific requirements for collective dismissal 2.88 3.25 4.13 0.00 2.63 0.00 3.00 2.13 3.13 3.25 2.38 2.13 3.75 3.25 2.88 3.50 0.00 0.00 2.38 1.88 4.88 1.50 1.88 3.88 3.75 3.00 0.38 2.88 3.63 1.88 1.88 3.75 2.88 1.88 3.13 3.75 3.88 2.38

OECD employment protection index 1.38 2.41 2.61 2.27 1.02 1.93 2.80 2.32 1.91 2.39 2.29 3.00 2.63 2.97 2.11 2.11 2.63 3.02 1.39 1.88 2.58 1.73 2.13 3.39 3.23 2.23 1.16 2.65 2.41 2.84 1.80 2.13 2.76 1.35 3.11 2.06 1.77 3.46 22

Daniel Hall United Kingdom United States 1.17 0.56 0.29 0.33 2.88 2.88 1.09 0.85

Note: * For France and Portugal, data refer to 2009. This indicator refer to version 3 as defined in the methodology. Source: OECD. To find out more about the methodology used to calculate the OECD employment protection indicators, see www.oecd.org/employment/protection.

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Daniel Hall

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