Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152875
Authors: 
Llaudes, Ricardo
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 441
Abstract: 
This paper studies the role of long-term unemployment in the determination of prices and wages. Labor market theories such as insider-outsider models predict that this type of unemployed are less relevant in the wage formation process than the newly unemployed. This paper looks for evidence of this behavior in a set of OECD countries. For this purpose, I propose a new specification of the Phillips Curve that contains different unemployment lengths in a time-varying NAIRU setting. This is done by constructing an index of unemployment that assigns different weights to the unemployed based on the length of their spell. The results show that unemployment duration matters in the determination of prices and wages, and that a smaller weight ought to be given to the long-term unemployed. This modified model has important implications for the policy maker: It produces more accurate forecasts of inflation and more precise estimates of the NAIRU.
Subjects: 
Kalman filter
Long-term unemployment
NAIRU
Phillips curve
JEL: 
C22
E31
E50
J64
Document Type: 
Working Paper

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