The past decade's natural rate and the dynamics of german unemployment: A case against demand policy?

Abstract

This paper attempts to highlight some recent cyclical and structural aspects of the German labor market. Moreover, whenever possible the results of our analysis are compared with findings for the U.S. labor market. Finally, policy implications which may be inferred from our study are discussed at some length. Research on unemployment may draw attention to at least two different but not mutually exclusive problems. The cyclical movement of unemployment gives rise to concern about the amount of the unemployment rate that can be reduced by aggregate demand policy only at the cost of an accelerating inflation rate. The relevant question is whether this unemployment rate has been constant during the last decade or whether it has been subject to (exogenous) shocks such as the oil price explosion and the productivity slowdown. With this knowledge the policy-maker can be advised as to what extent an expansive demand policy is an appropriate tool for achieving lower rates of unemployment without facing an accelerating inflation rate and, moreover, why the reduction of inflation in the seventies by restrictive demand management might cost more unemployment than in the sixties. The latter query calls in question some economic policy measures in the seventies: macroeconomic policy may not be able to make oil cheaper, but can try to mitigate adverse secondary effects on aggregate output and employment. But a recovery will not make the problem of unemployment simply disappear evenly for everyone. The analysis of aggregate unemployment is silent about which group of the labor force shoulders the main burden of unemployment and. is more likely to suffer from extreme low escape probabilities from unemployment. If the notion of a hard core of unemployed