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Wage Inflation and Structural Unemployment in Ireland

  • Economics


In this paper we represent structural unemployment by relating observed unemployment to wage inflation. An estimated series for the non-accelerating wage rate of unemployment (NAWRU) shows that the unemployment gap between observed unemployment and the structural rate provides an intuitive account of prevailing aggregate demand conditions within the Irish economy over the period 1980 to 2005. This indicates that the estimated NAWRU series is a good measure of Irish structural unemployment over the period. The estimated NAWRU was at a high level throughout the 1980s and declined over time such that any excess labour slack was dissipated by the mid-1990s. Between 1994 and 2001, the observed unemployment rate was below the estimated NAWRU indicating that the substantial inflationary pressure on wages was justified for the period. Since then, the gap between the estimate of the structural rate and observed rates of unemployment was not that substantial and reflects a healthier situation vis-à-vis wage inflationary pressure. The situation may have been helped by significant inward migration and productivity increases becoming embedded in the Irish economy.

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