NAWRUNon-Accelerating Wage Rate of Unemployment
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The UK's NAWRU peaked in the mid-1980s at around 9 per cent before falling steadily over the subsequent decades to less than 5 per cent of the labour force.
18) Since we see that developments in the estimated NAWRU from equation (9) is highly volatile from one year to the next, the OECD uses the Hodrick-Prescott filter to smooth the series.
We see that the wage relationship used in the NAWRU method is a special case of equation (6).
As shown in Chart 4, when using the direct method equilibrium unemployment is on the whole lower than NAWRU in the whole period from 1975 to 1991, while they have been more similar in the 1990s.
The production function method using the direct method for measuring equilibrium unemployment shows a somewhat more positive output gap at the end of the period as this estimate for equilibrium unemployment is slightly higher than NAWRU estimates.
In the same volume Barrell, Pain and Young (1994) calculate that the NAWRU in the UK varied over the 1980s but by the early-1990s it was no lower than 7-8 per cent.
They also often include a fully coherent model of the labour market, and the NAWRU for each sector is embedded and easily calculated.
The production function based approach is particularly problematic for France, as inertia in the labour market is very severe, and it is possible that unemployment could have been above the NAWRU for most of the 1980s (see Barrell, Pain and Young (1994) for a discussion of France).