The (Ir)relevance of the NRU for Policy Making: The Case of Denmark

Marika Karanassou (), Hector Sala and Pablo Salvador ()

No 2397, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.

Keywords: unemployment; frictional growth; chain reaction theory; labour market dynamics; natural rate of unemployment (search for similar items in EconPapers)
JEL-codes: E22 E24 J21 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

Published - published in: Scottish Journal of Political Economy, 2008, 55 (3), 369-392

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Related works:
Journal Article: THE (IR)RELEVANCE OF THE NRU FOR POLICY MAKING: THE CASE OF DENMARK (2008)
Working Paper: The (Ir)relevance of the NRU for Policy Making: The Case of Denmark (2006)
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