Natural Unemployment and Activity Rates: Flow-Based Determinants and Implications for Price Dynamics

70 Pages Posted: 16 Apr 2021

Date Written: February 10, 2021

Abstract

Motivated by the magnitude and cyclicality of transitions into and out of the labour force, we jointly estimate natural unemployment and participation rates through a forward-looking Phillips curve informed by structural labour market flows and demographic trends. We find that the estimated reaction of inflation to the participation gap is twice as large as that to the unemployment gap, and that the participation margin accounts for a significant share of total slack. Moreover, by exploiting a far-reaching and unexpected pension reform, we study the effects of a sudden expansion in labour supply that was not directly related to unemployment. The reform triggered a marked reduction in the employment to inactivity transitions of the elderly, determining an increase in natural participation (stronger than that in observed participation) but not in natural unemployment. Thus, the trends in activity explain in part why inflation has been so low in the recent years.

Keywords: labour market flows, labour supply, demographic trends, phillips curve, business cycles

JEL Classification: J11, J21, J64, E32

Suggested Citation

D’Amuri, Francesco and de Philippis, Marta and Guglielminetti, Elisa and Lo Bello, Salvatore, Natural Unemployment and Activity Rates: Flow-Based Determinants and Implications for Price Dynamics (February 10, 2021). Bank of Italy Occasional Paper No. 599, Available at SSRN: https://ssrn.com/abstract=3827520 or http://dx.doi.org/10.2139/ssrn.3827520

Francesco D’Amuri

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Marta De Philippis (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Elisa Guglielminetti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Salvatore Lo Bello

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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