Estimating labour and output gap: evidence from the Athens Olympic Region in Greece

Abstract

The present article estimates potential labour and labour gap as well as potential output and output gap using a Cobb–Douglas production function and a Hodrick–Prescott filter. We investigate the Athens Region in Greece by sector of economic activity, with the aid of the non-accelerating wage inflation rate of unemployment concept. The results support the idea that the Athens region seems to be working, mostly, over the regional economy's capabilities, a fact which leads to inflationary pressure.

Acknowledgements

The authors would like to thank Mark Taylor, editor, an anonymous referee of this journal, as well as Efthymios Tsionas for helpful comments on an earlier draft of this article. Financial support from the European Social Fund and the Labour Institute of the General Confederation of Greek Labour Unions is greatly appreciated.

Notes

¹ In the city of Athens is concentrated the largest number of immigrants (140 626 or 18.9% of population) which has been losing the population to the outer suburbs.

² This included a brand new international airport, urban highways and ring roads to decrease congestion, upgraded rail links, a new metro, a nonpolluting bus fleet and tramway lines which connect the city centre and the suburbs.

³ For overviews of the HP-filtering method shortcomings see Harvey and Jaeger (1993), King and Rebelo (1993), Cogley and Nason (1995) and Billmeier (2004).

⁴ The CD function has drawbacks as well (Stikuts, 2003): first, it is a simplified reflection of reality. For instance, it considers as homogenous the production and labour expanded originating from different sectors and skills. In other words, labour force or capital of the manufacturing industry is regarded as being the same as in the banking sector and can be easily transferred from one sector to another. Second, the data employed may result in a biased estimation, as in any econometric estimation, since the application of more accurate data is restricted by irregular availability (e.g. data concerning the utilization of capital are not accessible with adequately high frequency to be used in econometric studies). Third, natural or optimal factor utilization capacity is difficult to define. Finally, the Solow residual is a substantial component of the production function, which is calculated as estimation residual and as such is economically unexplained and freely interpretable. Irrespective of its drawbacks, the CD function is one of the methods, which along HP-filter is widely used to estimate the potential output (Stikuts, 2003). For a brief review of the model's theoretical limitations see Thirlwall (2001, pp. 185–7), which are, however, of limited practical character, as the author himself implies see (ibid, p. 187).

⁵ According to the recent findings of Christopoulos et al . (2005) regarding Greece and other EU countries, government size is an important determinant of the (un)employment rate.