International an unemployment rate that is considered natural has been established itself in authorities.
On the basis of this theory politics and decisions are being made internationally and in the EU.
On closer inspection however other consequences and conflicts of interest can be observed.
It is striking that the EU-Commission uses the unit labor costs as a measure for inflation. Thus the European Commission admits that inflation follows the unit labor costs. However the different development of the unit labor costs within the euro area without the possibility of balancing foreign trade balances through the exchange rate is a major problem within the euro area. But in here the EU-Commission refuses to acknowledge this connection.
According to the concept of NAWRU there are the same two deviations from NAWRU as in NAIRU. As the unemployment rate falls so will the pace of unit labor costs and thus inflation. The reason is again that the wage increases are passed on by corporations with rising prices. And if the unemployment rate rises then the development of unit labor costs and thus inflation slows down.
It is questionable whether an entire economy should accept the calculation of the unemployment rate from one individual authority. The authority that has the task of determining this unemployment rate could implement a completely different agenda. And since NAIRU and NAWRU are concerned with limiting inflation and the official NAWRU figures are very high anyway it can be assumed that actually higher wages should be prevented.
However when one site dictates conditions it is right to speak of a market failure. And when wage levels stagnate permanently it also reduces the incentives for employers to increase labor productivity through investment. Stagnating wages thus hinder technological progress and labor productivity growth.
[1] OECD Economic Studies No. 33, 2001/II - ESTIMATING THE STRUCTURAL RATE OF UNEMPLOYMENT FOR THE OECD COUNTRIES
http://www.oecd.org/social/labour/18464874.pdf
[2] EUROPEAN ECONOMY - Economic Papers 455 | May 2012 Structural unemployment and its determinants in the EU countries
https://ec.europa.eu/economy_finance/publications/economic_paper/2012/pdf/ecp_455_en.pdf
[3] Sind 14 Prozent Arbeitslose schon zu wenige? 2019-02-27
https://www.manager-magazin.de/politik/europa/arbeitslosigkeit-in-spanien-laut-eu-zu-niedrig-a-1255221.html
[4] AMECO
https://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm
[5] On Econometrics with a Human Face and Business Cycles: A Reply to Fioramanti and Waldmann’s Criticism on the EU’s NAWRU Methodology - ECONOMIC BRIEF 022 | MARCH 2017
https://ec.europa.eu/info/sites/info/files/eb022_en_0.pdf
NAWRU (Non-Accelerating Wage Inflation Rate of Unemployment)
The EU does not use the non-inflation rate (NAIRU/Non Accelerating Inflation Rate of Unemployment). Instead the Non-Accelerating Wage Inflation Rate of Unemployment (NAWRU) is used. The EU Commission uses unit labor costs as the basis for calculating inflation. These are the wages in relation to labor productivity. [2,p.3] [3]It is striking that the EU-Commission uses the unit labor costs as a measure for inflation. Thus the European Commission admits that inflation follows the unit labor costs. However the different development of the unit labor costs within the euro area without the possibility of balancing foreign trade balances through the exchange rate is a major problem within the euro area. But in here the EU-Commission refuses to acknowledge this connection.
According to the concept of NAWRU there are the same two deviations from NAWRU as in NAIRU. As the unemployment rate falls so will the pace of unit labor costs and thus inflation. The reason is again that the wage increases are passed on by corporations with rising prices. And if the unemployment rate rises then the development of unit labor costs and thus inflation slows down.
Critique
Various states with the euro as currency have been in crisis for a long time and have unemployment rates of 10%, 20% or almost 30%. Nevertheless the EU-Commission uses its own figures for the natural unemployment rates (NAWRU/Non-Accelerating Wage Inflation Rate of Unemployment). According to the 2017 figures the EU-Commission considers unemployment rates of 13.5% for Greece, 15.9% for Spain, 9.5% for France, 10.1% for Italy, and 9.2% for Cyprus as normal. Local people will probably see this supposed normality different. [4]It is questionable whether an entire economy should accept the calculation of the unemployment rate from one individual authority. The authority that has the task of determining this unemployment rate could implement a completely different agenda. And since NAIRU and NAWRU are concerned with limiting inflation and the official NAWRU figures are very high anyway it can be assumed that actually higher wages should be prevented.
However when one site dictates conditions it is right to speak of a market failure. And when wage levels stagnate permanently it also reduces the incentives for employers to increase labor productivity through investment. Stagnating wages thus hinder technological progress and labor productivity growth.
[1] OECD Economic Studies No. 33, 2001/II - ESTIMATING THE STRUCTURAL RATE OF UNEMPLOYMENT FOR THE OECD COUNTRIES
http://www.oecd.org/social/labour/18464874.pdf
[2] EUROPEAN ECONOMY - Economic Papers 455 | May 2012 Structural unemployment and its determinants in the EU countries
https://ec.europa.eu/economy_finance/publications/economic_paper/2012/pdf/ecp_455_en.pdf
[3] Sind 14 Prozent Arbeitslose schon zu wenige? 2019-02-27
https://www.manager-magazin.de/politik/europa/arbeitslosigkeit-in-spanien-laut-eu-zu-niedrig-a-1255221.html
[4] AMECO
https://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm
[5] On Econometrics with a Human Face and Business Cycles: A Reply to Fioramanti and Waldmann’s Criticism on the EU’s NAWRU Methodology - ECONOMIC BRIEF 022 | MARCH 2017
https://ec.europa.eu/info/sites/info/files/eb022_en_0.pdf
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