Unemployment dynamics, wage flexibility, and the NAIRU in Austria

Abstract

This paper presents some empirical evidence of an increase of distributional pressures in the Austrian economy as reflected in a rise of the NAIRU over the past fifteen years. Employing a simple macroeconomic model of wage-price formation we have been able to establish that both the increase in employers' contributions to social security and the rising share of longterm unemployment associated with higher overall unemployment have exerted pressure on real product wages and, thus, have pushed up the “equilibrium rate of unemployment”. Even if this latter persistence effect in unemployment is ignored for a moment, the Austrian NAIRU seems to have approximately doubled since 1973. It should be noted, however, that despite of having trended upwards the Austrian NAIRU still compares very favourably with that of most other OECD countries. The estimation results reveal an impressive amount of real wage flexibility putting Austria among the top league in Europe. In particular, this stems from the fact that real product wages seem to be easily adapted to external price shocks and productivity shocks.