Author: Kurt Vogler-Ludwig, Luisa Stock
Publisher: Thematic paper for the European Employment Observatory of the European Commission, Directorate General for Employment, Social Affairs and Equal Opportunities
This thematic paper for the European Employment Observatory investigates the quality of two macro-economic approaches which relate unemployment, output and inflation. The non-inflationary rate of unemployment (NAIRU) relates price and wage expectations in an equilibrium model. Okun’s law describes the relation between unemployment and output. Both approaches have been challenged by the recent crisis. The paper concludes that this type of macro-economic modelling is hardly able to reflect basic behavioural and structural characteristics of the economies. Moreover, statistical estimation methods have limited capacities to mirror the theoretical principles. The two concepts are thus no adequate substitute to economic modelling.