Some Problems in Estimating the "Natural" Rate of Unemployment from the Expectations-Augmented Phillips Curve

Abstract

Now, nearly twenty years after its introduction in Friedman (1968), the concept of the rate of is standard in macroeconomics. Theoretically, it is fairly easy to grasp. The natural rate of unemployment prevails when there is equilibrium on the labor market in the sense that price expectations are fulfilled. In the same way as demand and supply, the level of employment is determined by real variables only, provided that price developments are fully anticipated. In a competitive labor market, this implies that demand equals supply. Consequently, the only reason for unemployment in a situation with no excess supply of labor will be structural misfits on the market. However, an equilibrium rate of unemployment may also be the product of a nonclearing market where wages are determined by e.g. trade unions; see Greenhalgh, Layard & Oswald (1983, p. ii). Alternatively, the concept of NAIRU (Non-Accelerating Inflation Rate of Unemployment) is often cited. This term seems to be somewhat broader than the natural rate, implying a rate of unemployment compatible with a stable rate of inflation. According to Thirlwall (1983), there is no empirical difference between the concepts since both are estimated in the same way. Regardless of which term is used, the equilibrium (natural) rate of unemployment is difficult to identify empirically. Nevertheless, the need for such estimates is obvious. Most market economies have exhi-