Structural estimates of equilibrium unemployment in six OECD economies

Abstract

In Europe, neither unemployment rates nor institutions are uniform. In the EMU, countries have coordinated their monetary policy, and fiscal policy might follow. Does convergence in fiscal policy imply that unemployment rates will converge, too, or is diversified fiscal policy desirable? An answer to this question requires insight into the dependence on fiscal policy of the unemployment rate in equilibrium. This study estimates the equilibrium rate of unemployment and shows that it has been affected significantly by taxes and benefits. Uniform fiscal policy would not, however, harmonise the unemployment rates because the impact of policy varies widely across the OECD economies.