IZA DP No. 75: Adjustment Dynamics and the Natural Rate: An Account of UK Unemployment
published in: Oxford Economic Papers, 52 (2000), 178-203
This paper challenges what is the standard account of UK unemployment, namely that the major swings in unemployment over the past 25 years are due predominantly to movements in the underlying empirical "natural rate of unemployment" (NRU). Our analysis suggests that the British NRU has remained reasonable stable through time and that the medium-run swings in unemployment are due, instead, to very prolonged after-effects of persistent (transitory but long-lasting) shocks. We argue that (a) past UK labour market shocks have prolonged after-effects on unemployment due to interactions among different lagged adjustment processes in the labour market, (b) many of the important shocks that have hit the UK labour market over the past 25 years have been persistent, and (c) the persistence of the shocks is complementary to the persistence of the lagged adjustment processes in generating movements of UK unemployment.