Wage inflation and structural unemployment in Ireland

Abstract

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 a good reflection of prevailing aggregate demand conditions and indicates that our estimated NAWRU series is a good measure of the Irish structural unemployment situation. 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 we report that the observed unemployment rate was below our estimated NAWRU indicating that the substantial inflationary pressure on wages was justified for this period. Very recently, the gap between our estimate of the structural rate and observed rates of unemployment is not very substantial and reflects a healthier situation vis-a-vis wage inflationary pressures which are supported by inward migration and productivity increases becoming embedded in our economy.