NAWRU and potential output in France

Abstract

This article presents theory-consistent estimates of nonaccelerating wage rate of unemployment (NAWRU) and potential output in France. These estimates are obtained from an unobserved-components system approach combining a wage-Phillips curve and an Okun law's relationship. By applying the Apel and Jansson (1999) specification, the potential output and the NAWRU are both treated as unobserved stochastic processes and estimated simultaneously. In order to control the effect on wage setting of reductions in employers’ social security contributions (SSC), we construct and add in the wage-Phillips curve an index of SSC exemptions. According to the results, from the mid-1990s, and especially over the years 2000–2004, the estimated NAWRU is consistent with this period of labour cost moderation and reductions in employer social security contributions.

Acknowledgement

I am grateful to Jean–Guillaume Sahuc for his helpful comments.

Notes

¹ For example, using microeconomic data, Laroque and Salanié (2000) and Crépon and Desplatz (2001) showed that the increase in employment results mainly from a fall in job destruction rather than an increase in job creation.

² This indicator of cuts in SSC is constructed by dividing the total amount of SSC exemptions by the total wage bill.

³ Given the formulation of the wage-Phillips curve we consider that wages are integrated of order 2. We tested this hypothesis with the Haldrup (1994) test for double unit roots and confirmed that the wage rate is I(2).

⁴ See Hamilton (1994) for more details about maximum-likelihood estimation using the Kalman filter method.