Inflation pressure and European unemployment

Abstract

While the recent failure of unemployment to fall in many OECD economies is often attributed to labour market rigidities, there is a strong cross–sectional correlation between changes in unemployment since the last recession and changes in inflation over the same period (1993–1997). Furthermore, this linkage is dominated by the influence of initial (i.e. 1993) inflation. This can be interpreted in terms of two effects: countries with higher 1993 inflation had less scope for relaxation of monetary policy, and may have experienced larger increases in expected inflation. These inflation pressure effects in turn are related to the EMU inflation convergence criteria.