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Wage Formation And The (Non-)Existence Of The Nairu, Peter Skott
Wage Formation And The (Non-)Existence Of The Nairu, Peter Skott
Peter Skott
The influence of NAIRU theory on economic policy is both puzzling and unfortunate, especially in a European context. This paper shows that standard rationality assumptions and objective functions may fail to generate a well-defined NAIRU in a unionized economy. It then presents two simple models with endogenous wage aspirations. One version of the model produces a unique long-run NAIRU while the other implies the presence of aspiration-induced hysteresis in the employment rate. The hysteretic version seems preferable on theoretical grounds and - at a stylized level - this version also fits the empirical evidence better than the non-hysteretic version. The …