Can Productivity Growth Explain NAIRU? Long-Run Evidence from Britain, 1871-1999

34 Pages Posted: 8 Aug 2002

See all articles by Timothy J. Hatton

Timothy J. Hatton

University of Essex - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: June 2002

Abstract

The 'new economy' of the 1990s saw improving Phillips curve trade-offs coupled with faster productivity growth, particularly in the United States. This has led to a revival of the idea that there is an inverse relationship between productivity growth and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Because productivity trends evolve slowly, such effects have been difficult to identify using short runs of data. This paper investigates this relationship over a much longer period than usual. It draws on recently developed, historically-consistent, time series for the UK from 1871 to 1999. A two-equation model of unemployment and wage setting, that incorporates productivity effects, is estimated over the whole period allowing for shifts across major periods associated with changes in labour market institutions. The results indicate that trends in labour productivity do matter, but they go only part of the way towards explaining wide swings in average unemployment across the decades. Thus productivity is not the whole story, but it is some of the story. In addition, institutional changes appear to have enhanced the effects of productivity on the NAIRU, particularly in the post-Second World War era.

Keywords: Unemployment, productivity growth

JEL Classification: E32, J64, N14, N34

Suggested Citation

Hatton, Timothy J., Can Productivity Growth Explain NAIRU? Long-Run Evidence from Britain, 1871-1999 (June 2002). CEPR Discussion Paper No. 3424. Available at SSRN: https://ssrn.com/abstract=322641

Timothy J. Hatton (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 872182 (Phone)
+44 1206 872724 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
70
Abstract Views
1,222
rank
329,185
PlumX Metrics