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This is mainstream neoclassical NAIRU bullshit. Read this revised methodology for calculating output gaps [PDF] and weep.

Also, Noahpinion has a guest post on How important was the "structural balance" screw-up in driving European austerity? (October 05, 2013) describing what's wrong with the European Commission's econometrics.

The European Commission uses a production function methodology for calculating potential growth rates and output gaps (see here). It features a simple Cobb Douglas specification where potential output depends on TFP and a combination of factor inputs (potential labor and capital). Importantly for what follows, potential labor input is calculated as:

Working age Population x Participation rate x Average hours worked x (1 - NAWRU)

It's important to focus on potential labor input since the bulk of the revisions applied between 2008 and 2010 to potential GDP arose because of revisions to labor input.

And note the use of NAWRU rather than NAIRU. If you use NAIRU (non-accelerating-inflation rate of unemployment) you're using unemployment as a policy lever to achieve an inflation policy target. But if you use NAWRU (non-accelerating-wages rate of unemployment) you're using deliverately using unemployment to depress wages, but hiding that under a supposedly objective econometric model.

It really is criminal.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Jul 26th, 2014 at 12:07:58 AM EST
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