High Unemployment in Europe: Diagnosis and Policy Implications
Econometric evidence suggests that the non-accelerating inflation rate of unemployment (the NAIRU) has risen sharply in Europe in the past fifteen years. In the first section of this paper, I review the recent proliferation of supply-side models that say interesting things about why the NAIRU has increased so substantially in Europe. In the second section of the paper, I employ a simple example to show how aggregate demand should optimally be managed in response to transitory and permanent supply shocks, especially those shocks that cause a persistent rise in the NAIRU. Also, I discuss some policy implications of the increasingly popular "hysteresis hypothesis," that the NAIRU itself is influenced by the time path of actual unemployment.
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More About This Work
Published as part of Unemployment in Europe: Analysis and Policy Issues (Stockholm: Timbro, 1986).