Jpm euro area_slack__the_2014-02-03

Europe Economic Research
03 February 2014

Euro area slack: there is much
more than you think

 Estimating the amount of slack in the Euro area economy, and gauging how
it will evolve over time, are of critical importance. Judgments about the
amount of slack and its evolution determine the appropriate stance of
monetary policy and the appropriate degree of fiscal consolidation.
Misjudgments about slack can not only lead to weak growth, high
unemployment and inflation that is too low, but can also turn cyclical
weakness into structural weakness through hysteresis.
 Since the beginning of 2008, the Euro area unemployment rate has risen by
4.7%-pts to reach the current level of 12%. This is the highest level seen
since the 1930s. At first blush, this would suggest a huge amount of slack.
 However, official institutions in the Euro area—the European Central Bank
and the European Commission—do not believe this to be the case. They
look at both the rise in long-term unemployment, and the disconnect
between unemployment and other measures of labor market slack (such as
skill shortages and vacancies), and assume that much of the rise in
unemployment is structural in nature. This leaves them thinking that the
output gap is only modest, despite the fact that the level of GDP is still 3%
lower than the last cyclical peak at the beginning of 2008.

Economic and Policy Research
David Mackie
(44-20) 7134-8325
david.mackie@jpmorgan.com

Malcolm Barr
(44-20) 7134-8326
malcolm.barr@jpmorgan.com

Greg Fuzesi
(44-20) 7134-8310
greg.x.fuzesi@jpmorgan.com

Marco Protopapa
(44-20) 7742 -7644
marco.protopapa@jpmorgan.com

Raphael Brun-Aguerre
(44-20) 7134-8308
raphael.x.brun-aguerre@jpmorgan.com
JPMorgan Chase Bank N.A, London Branch

 We disagree with this judgment. As the last business cycle showed, solid
growth can reduce long-term unemployment with very little upward pressure
on wages. This means that the long-term unemployed are not necessarily
structurally unemployed. Moreover, because of the experience of the backto-back deep recessions in the periphery, some indicators of labor market
slack have been at their lower bound for a while. The proportion of firms
reporting labor as a constraint on production cannot go below zero; nor can
the vacancy rate. Across the periphery, these indicators reached their lower
bound after the first recession in 2008/9, so they couldn’t fall further in the
second recession that began in 2011. This means the additional rise in
unemployment in the 2011/12 recession could not be matched by a decline
in skill shortages and vacancies.
 As a consequence, we believe there is likely much more slack in the region
than the ECB and EC assume. This means that the monetary stance should
be much easier and that the degree of fiscal consolidation should be less.

 If our assessment is correct, then growth is likely to remain lackluster
and inflation will remain very low for a very long time. This means that
the ECB policy rate is likely to remain at the current level or lower for
much longer than the central bank anticipates, and the ECB will remain
under persistent pressure to do more.
 A misjudgment about the amount of slack in the economy not only
condemns the region to sub-par performance for many years to come, but
it also adds to the likelihood that cyclical weakness turns into structural
weakness through weak capital formation and hysteresis in the labor
market.
See page 24 for analyst certification and important disclosures.
www.jpmorganmarkets.com

David Mackie
(44-20) 7134-8325

Contents

Introduction and overview .......................................... 2
Starting to think about the output gap ......................... 3
Official estimates of the Euro area output gap............. 5
The utilization of labor................................................ 6
The utilization of capital ........................................... 10
The behavior of inflation........................................... 12
Putting it all together................................................ 13
The output gap and the monetary stance.................. 15
The output gap and the fiscal stance ........................ 17
Consequences and tracking..................................... 17
Annex 1: The zero nominal bound in skill shortages and
vacancies in the periphery ....................................... 19
Annex 2: The relationship between skill shortages and
unemployment in the core........................................ 21
Annex 3: Estimates of structural unemployment at the
country level............................................................ 22
Recent J.P. Morgan Global Issues ........................... 23

Euro area slack: there is much more than you think
03 February 2014

Introduction and overview
When thinking about the amount of slack in the Euro area, and how it will evolve
over time, two critical judgments need to be made. First, the current magnitude of the
output gap needs to be gauged. This sets the starting point for thinking about the
evolution of slack. And second, the development of the supply side of the
economy—labor supply and labor productivity— needs to be determined. This
influences the pace at which slack diminishes for any given path of demand. Getting
these judgments right is of huge importance. Judgments about the magnitude of the
output gap and its evolution over time play a critical role in determining the
appropriate stance of monetary policy. And they play a critical role in determining
the appropriate degree of fiscal adjustment. Policy settings will then influence the
evolution of both demand and supply in the economy.
It is clear that policymakers in the Euro area (at the European Commission and the
European Central Bank) have had a very pessimistic view of supply side
developments in recent years. They have assumed that much of the decline in output
since 2008 represents a permanent loss, which would mean the current output gap is
modest. Moreover, the EC and the ECB both assume relatively lackluster growth
potential in the coming years, which would mean the output gap closing relatively
quickly even with fairly modest increases in demand. Although there is some
acknowledgement that the supply side of the economy is influenced by the business
cycle, these institutions stress the importance of structural reform as the key means of
improving the supply side.
In contrast, we have a more constructive view of the Euro area supply side. Although
developments in recent years have likely contributed to a permanent loss of output,
our inclination is to think that the output gap is currently much larger than the ECB
and EC assume. Moreover, our inclination is to think that the supply side is
somewhat endogenous to developments in demand, although an improvement in the
supply side may require strong demand and tightening labor markets.
Views on the supply side have enormous implications for monetary and fiscal policy.
Our judgment is that the ECB’s monetary stance is around 200 basis points tighter
than it should be, given the macro landscape. This gap exists partly due to the ECB’s
more pessimistic view on the supply side and partly due to the challenge of
overcoming the zero nominal bound. Meanwhile, the European Commission’s

Euro area employment, unemployment, underemployment and inactivity
Level millions and % of labor force, 15-74
2008Q3
Full time employed +part time employed not seeking additional work (1)
Underemployed part time workers (2)

2013Q3

Difference millions

Difference %-pts

140.1 (89.4)

133.3 (84.3)

-6.8

-5.1

5.2 (3.3)

6.6 (4.2)

1.4

0.9

Employed persons (1+2)

145.2 (92.7)

139.9 (88.5)

-5.3

-4.2

Unemployed persons (3)

11.4 (7.3)

18.2 (11.5)

6.8

4.2

Active persons (1+2+3)

156.6 (100.0)

158.1 (100.0)

1.5

0.0

Persons seeking work but not immediately available (4)

1.8 (1.2)

1.6 (1.0)

-0.2

-0.2

Persons available to work but not seeking work (5)

5.3 (3.4)

7.1 (4.5)

1.8

1.1

Potential additional labor force (4+5)

7.1 (4.6)

8.6 (5.5)

1.5

0.9

Other inactive (6)

83.9 (53.6)

81.4 (51.5)

-2.5

-2.1

Inactive (4+5+6)

91.1 (58.2)

90.0 (56.9)

-1.1

-1.3

247.6 (158.2)

248.1 (156.9)

0.5

-1.3

Total population (1+2+3+4+5+6)
Source: Eurostat
2

David Mackie
(44-20) 7134-8325

03 February 2014

pessimistic view on the supply side is generating pressure for a greater degree of
fiscal consolidation than we think appropriate. Fiscal governance now focuses on
structural budget positions rather than headline positions, with the fiscal pact
requiring that governments move toward balancing their structural budgets. While
this might sound reasonable, the size of the structural budget position is determined
by the magnitude of the output gap. A pessimistic view on the supply side attributes
more of the overall deficit to the structural position, rather than to cyclical influences,
which means more fiscal austerity in the short term.
The macro consequences of misjudging the output gap are clear: growth will remain
lackluster, unemployment will remain elevated, inflation will remain well below the
ECB’s inflation objective, cyclical unemployment will turn into structural
unemployment, and the erosion of growth potential will be sustained. While the first
three consequences can be observed, the last two cannot be. This means that the
judgments made by policy makers are of critical importance. It is true that we have to
recognize the considerable uncertainty in estimating output gaps in real time. This
means there are risks of policymakers doing either too much or too little. With
inflation currently very low, with the real possibility of deflation and hysteresis, and
with social and political stress already very elevated, we consider the onus to be on
policy makers is to err on the side of doing too much. In our view, the ECB is
currently positioned to do too little.
Normally, the passage of time helps us to choose between competing hypotheses.
Unfortunately, this may not be true in this situation. To the extent that there is some
endogeneity between the supply side and the demand side, ex ante judgments about
this endogeneity will significantly influence ex post realizations. For example, if the
supply side is stronger in the face of better demand conditions, then an ex ante
judgment by policy makers that this will happen will ensure that the economy
achieves an equilibrium path with a better profile for both demand and supply. But, if
the ex ante judgment by policy makers is that the supply side is not related to
demand, then, even if that judgment is incorrect, policy will be set in a manner that
makes it likely that the economy will achieve a different equilibrium path with a
worse profile for both demand and supply. Ex post it will not be possible to
determine, which ex ante view was correct. This means that policymakers—central
bankers in particular—need to run an experiment. This is something that the Federal
Reserve and Bank of England are willing to do, but the ECB is not. Over time, Euro
area policy makers may claim victory for their pessimistic view of the supply side.
But it would be a pyrrhic one, in our view.

Starting to think about the output gap
One starting point for thinking about the output gap is to extend the level of real
GDP from the prior cyclical peak (1Q08) at the same potential pace of growth as that
seen in the last business cycle. This is done in the chart below with the potential pace
of growth defined as the level consistent with a stable unemployment rate in the last
cycle (i.e., a pace of growth of 1.6%). This exercise suggests that the current level of
output is 11.1% below where it would have been had it continued to grow beyond the
last cyclical peak at the same potential pace of growth as that seen in the last business
cycle. This can be viewed as an estimate of the output gap.
This estimate of the output gap is very substantial. Importantly, two very strong
assumptions are being made in the calculation. First, that the economy was in an
equilibrium in the first quarter of 2008: essentially that the output gap was zero. And
second, that the growth of potential since then has been the same as in the last
business cycle. Neither of these assumptions are likely to be true.
3

David Mackie
(44-20) 7134-8325

03 February 2014

In terms of judging how close the economy was to an equilibrium at the peak of the
last business cycle, we can look at inflation developments and direct measures of
resource utilization. It is commonplace to assume that the economy is in equilibrium
when inflation pressures are absent. In most specifications of the Phillips curve, with
some anchoring of inflation expectations at the central bank’s objective, inflation
pressures are absent when inflation is in line with the central bank’s objective. In this
regard, we can look at peak levels of two different measures of inflation. Core CPI
inflation peaked at 1.9% in mid-2007, which at first blush would point to resource
utilization rates at their equilibrium (essentially a zero output gap). But the GDP
deflator peaked at 2.5% at the end of 2007, which would point to resource utilization
rates above their equilibrium (essentially a positive output gap). Direct survey
measures of capacity utilization, labor shortages, and equipment shortages were all
close to prior cyclical peaks, which would suggest an above-equilibrium level of
resource utilization. Our inclination is to assume a positive output gap at the start of
2008 of around 1.5%.
Meanwhile, growth potential appears to have slowed relative to the last business
cycle given labor market developments. In the first quarter of 2008, the
unemployment rate hit a trough of 7.3%. It now stands at 12%. With an Okun
coefficient of around 0.5, which was the experience of the last business cycle, a rise
in the unemployment rate of 4.7%-pts would suggest an increase in the output gap of
around 9.5%.With the level of GDP currently 3% lower than the last cyclical peak,
this suggests an increase in the level of potential output of around 6.5%. This would
imply an annualized quarterly pace of growth of potential of around 1.2% since
2007, somewhat lower than the 1.6% estimate from the last business cycle.
Interestingly, this 1.2% estimate of growth potential is almost identical to our
analysis of what growth potential might be in the current business cycle ignoring any
persistent structural effects of the financial crisis and recession (see: The long slide in
Euro area growth potential is likely to continue, Special Report, March 25, 2010).
If we assume a positive output gap at the start of 2008 of 1.5% (consistent with a
natural rate of unemployment—NAIRU—of 8%) and growth in potential of around
1.2% since then, this would put the output gap currently at around 8%. This is
smaller than the initial estimate but much larger than any official estimates.
However, this estimate assumes that all of the rise in unemployment since 2008 is
cyclical: essentially that the NAIRU has remained constant at 8%. To the extent that
Euro area GDP
€bn
2500
2400
Extrapolated
2300
2200
2100
Actual
2000
1900
03

05

Source: Eurostat and J.P. Morgan

4

07

09

11

13

03 February 2014

David Mackie
(44-20) 7134-8325

some of the rise in unemployment is structural, then the increase in potential output
in recent years will have been less than these calculations suggest and the current
output gap will be correspondingly smaller. Deciding how much of the rise in
unemployment is structural, and how the supply side will evolve as demand recovers,
is of crucial importance in gauging the magnitude of the output gap and its likely
evolution.

Official estimates of the Euro area output gap
For 2013, the European Commission puts the Euro area output gap at -3%, the IMF
puts it at -2.7%, and the OECD puts it at -3.8%. These numbers are much smaller
than the simple estimates laid out above. What is striking about these official
estimates is not only the magnitude of the permanent loss in output that they imply
but also the extent to which these official perceptions of the supply side have
changed over recent years, regarding both the state of the economy at the last cyclical
peak and growth potential since then.
For example, back in 2007 all three official institutions thought that there was still
slack in the Euro area in 2007, essentially a negative output gap. Over the past six
years, the estimates of the output gap in 2007 have moved dramatically and all three
institutions now believe that the Euro area economy was significantly overheated at
the peak of the last business cycle, with a positive output gap in 2007 of between
2.7% and 3.5%. For the European Commission, the IMF, and the OECD, the
cumulative revisions to their estimates of the output gap in 2007 have been 3.2%-pts,
3.4%-pts and 3.8%-pts respectively.
Perceptions of the output Euro area output gap in 2007, % of potential GDP
Date of analysis

OECD

IMF

EC

2007

-0.3

-0.3

-0.5

2008

0.8

0.5

1.1

2009

1.9

1.8

2.5

2010

1.4

1.7

2.2

2011

2.5

2.4

2.5

2012

3.3

2.7

n.a

2013

3.5

3.1

2.7

The dates of the analysis are from the relevant publications for the end of each respective year.
Source: OECD, IMF and European Commission

OECD perceptions of Euro area growth potential, %oya
Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

2007

2.0

1.9

n.a

n.a

n.a

1.7

1.6

2008

2.0

1.9

1.7

n.a

n.a

1.6

1.4

2009

1.9

1.9

1.2

1.0

n.a

1.1

0.9

2010

n.a

1.8

0.9

0.9

0.9

1.0

0.8

2011

n.a

n.a

1.0

1.0

1.1

1.1

0.9

2012

n.a

n.a

n.a

1.2

1.2

1.2

0.8

2013

n.a

n.a

n.a

n.a

1.3

1.2

0.8

Source: OECD
5

David Mackie
(44-20) 7134-8325

03 February 2014

It is also clear that these institutions have revised their views of growth potential
since 2007 to a significant extent. For example, back in 2007, the OECD thought that
growth potential in the Euro area in the period 2008-2009 would average close to
2%. Now the OECD’s estimate of growth potential in those two years is 1.2%. It is
not possible to say what the OECD’s estimate of growth potential for the period
2008-2013 was back in 2007. But, we know that their latest estimate is an average of
0.9%. The European Commission’s latest estimate of Euro area growth potential in
the period 2008-2013 is 0.7%. The lower estimate from the Commission contributes
to their smaller estimate of the current output gap.
Since 2009, official institutions have made substantial changes to their views of the
Euro area supply side, regarding both the position of the economy at the last cyclical
peak and the pace of growth of potential output since then. These changes have been
based on the idea that severe financial crises tend to generate permanent losses in
output, reflecting reduced capital spending, fewer firm births and deaths, premature
scrapping of the capital stock and higher natural rates of unemployment.
Given the importance of having an accurate assessment of the output gap, we think it
worth looking at the evolution of direct measures of the supply side since 2007. Most
of these relate to the labor market, and are therefore linked to the natural rate of
unemployment. This is helpful given the relationship between the output gap and the
gap between actual unemployment and the natural rate of unemployment. A
reasonable rule of thumb is that the output gap is twice the size of the gap between
actual unemployment and the natural rate. Direct measures of the evolution of the
supply side in the labor market are skill shortages, the Beveridge curve, and long
term unemployment. Other direct measures of the supply side come from capacity
utilization and survey measures of equipment shortages. It is also worth considering
to what extent inflation dynamics can guide our views on the supply side.

The utilization of labor
From the peak in 2008 to the autumn of 2013, employment in the Euro area fell by
5.3 million. Over this period, the number of unemployed increased by 6.8 million.
This means that the participation rate—the share of employed and unemployed in the
population of working age—increased slightly from 63.2% to 63.7%.
European Commission estimate of Euro area growth potential
%oya
2.5
2.0
1.5
1.0
0.5
0.0
98

00

Source: European Commission

6

02

04

06

08

10

12

14

16

David Mackie
(44-20) 7134-8325

03 February 2014

To be defined as unemployed an individual has to be without a job, to be available to
work within the next two weeks, and to have actively sought work in the past four
weeks. The critical question is not whether the unemployed are available and looking
for work —they are by definition—but whether they have the right skills or are in
the right geographic location to fill the available vacancies. To the extent that there is
a mismatch between the unemployed and the available vacancies, either because they
do not have the right skills or are unwilling or unable to move to the right location, it
is generally assumed that the unemployment is of a structural nature.
The simplest way of gauging the extent to which the rise in unemployment since the
start of 2008 is structural is to look at the duration of unemployment. This is based
on the idea of hysteresis: individuals who have been out of work for an extended
period of time tend to experience an erosion of their human capital.
Indeed, this was the methodology used by the OECD in 2009 to estimate the impact
of the crisis on structural unemployment rates (NAIRUs). The OECD estimated the
evolution of long-term unemployment (defined as unemployment lasting more than
twelve months) on the basis of projections of total unemployment. In the Euro area, it
was assumed that around 70% of the unemployed eventually become long-term
unemployed. It was then assumed that two-thirds of the rise in long-term
unemployment in the Euro area would translate into a rise in the NAIRU. This
methodology made it inevitable that those countries which have seen the largest rises
in total unemployment would see the largest increases in the OECD’s estimates of
structural unemployment.
More recently the OECD has reverted to its traditional approach to estimating
NAIRUs—Kalman filter estimates of time varying NAIRUs in a Phillips curve
framework. The OECD has argued that the updated Kalman filter approach generates
similar profiles for the NAIRU as the simpler methodology based on long-term
unemployment. Thus, the tight relationship between the evolution of actual
unemployment and the evolution of the OECD’s estimate of the NAIRU remains.
It is clear from this discussion that gauging the evolution of the NAIRU—and thus
the output gap—is very judgmental. It seems clear from the last business cycle that
long-term unemployment is sensitive to actual growth. In Spain, for example, the
long-term unemployment rate fell from 5% in 2000 to 1.7% in 2007. To some extent
this may have reflected the widespread availability of low-skilled jobs in the
construction sector. But, in Italy, which did not experience a construction boom, the
Euro area skill shortages in manufacturing and unemployment
7

12

Unemployment rate

10

8

8

9

6
4

10

2

11

0
-2

Skill shortages

12

-4

13

-6
85

90

95

00

05

10

Source: European Commission and Eurostat
7

David Mackie
(44-20) 7134-8325

03 February 2014

long-term unemployment rate fell from 6.2% in 2000 to 2.9% in 2007. These
declines were accompanied by very little wage pressure. Spanish and Italian labor
market reforms at the time may have helped these declines. The more recent labor
market reforms in Spain are much more substantial, raising the likelihood that longterm unemployment could fall significantly in the coming years. Moreover, the
OECD's methodology for estimating time varying NAIRUs is problematic, in our
view. Many of the equations for Euro area countries have estimation periods starting
in the 1970s. Given that the level of inflation has fallen significantly over recent
decades, globalization has increased dramatically, and central banks have become
more independent, it is unlikely that the shape of the Phillips curve has been stable
over this period. Nominal rigidities are likely to be greater at lower levels of
inflation, the impact of external developments has likely risen over time due to
globalization, and inflation expectations are likely better anchored than in the past
due to central bank independence. All of these would contribute to a flattening of the
Phillips curve, which would make it hard to back out a reliable estimate of the
NAIRU.
Given that structural unemployment is closely related to the idea of a mismatch
between the unemployed and the available vacancies, there are other ways we can
consider how the NAIRU may have evolved in recent years.
The issue of skill shortages can easily be illustrated by looking at the relationship
between the European Commission’s survey on factors limiting output and the actual
unemployment rate. Prior to 2011, there was a reasonably close relationship between
the EC survey measure of skill shortages and unemployment. Since 2011, this
relationship has broken down. The current level of skill shortages would normally be
consistent with an unemployment rate of around 9%. At first blush, this would
suggest a significant rise in the natural rate of unemployment given that the current
unemployment rate is 12%.
What is striking about the relationship between skill shortages and unemployment is
that the break occurred in 2011. The rise in unemployment in the recession of 20082009 was matched by a decline in skill shortages broadly in line with the historical
pattern. Only since the recession prompted by the sovereign crisis has the subsequent
rise in unemployment not been matched by a corresponding movement in skill
shortages.
Euro area skill shortages in services and unemployment
% , scale inverted

%, bal
14

Unemployment rate

7

12

8

10
9

8

10

6
4

11

2

Skill shortages

12

0

13

-2
03

05

07


8

09

11

13

David Mackie
(44-20) 7134-8325

03 February 2014

We believe that the explanation for this can be found in the nature of the question in
the EC survey. Firms are asked to identify factors that are limiting production.
Clearly there is a zero lower bound to the answers to this question: the proportion of
firms saying that labor is a constraint on their production cannot fall below zero.
Spain approached this zero bound in the spring of 2009 and the survey has held at
that level despite the fact that the unemployment rate has risen by almost 10%-pts
since then. Similarly, Italy approached the zero bound in early 2009 and has held at
that level since then, even though the unemployment rate has risen by 5%-pts (see
Annex 1 for some relevant charts).
The existence of the zero bound makes it hard to use the EC survey to evaluate the
degree of structural deterioration in Euro area labor markets. If we exclude those
countries that are at the zero bound in the proportion of firms reporting labor
shortages as a factor limiting production—Italy, Spain and Portugal—then there is
limited evidence of structural deterioration elsewhere in the Euro area. But, this
doesn’t help much given that the rise in the European Commission and OECD
estimates of the NAIRU for the region as a whole is dominated by developments in
these three countries.
Another way to evaluate the extent of mismatch in the labor market is to look at the
Beveridge curve, which shows the relationship between unfilled vacancies and
unemployment. A rightward move in the Beveridge curve—essentially a higher
unemployment rate for any given level of unfilled vacancies—is usually interpreted
as a sign of structural deterioration in the labor market. And, at first blush, this is
what appears to have happened in recent years. Instead of plotting the traditional
Beveridge curve, the exhibit below shows the time series relationship between
unemployment and vacancies. The relationship between vacancies and
unemployment that existed between 2004 and 2010 appears to have broken down as
the region moved back into recession in 2011. This represents a rightward move in
the Euro area Beveridge curve, which could be interpreted as evidence of a higher
natural rate of unemployment. But, as with the data on skills shortages, there is a
problem with the vacancy data given the back-to-back deep recessions in the
periphery. By definition, the vacancy rate—defined as the ratio between the number
of job vacancies and the sum of the number of vacancies and employment—cannot
fall below zero. It looks like some countries reached the lower nominal bound on the
vacancy rate after the first recession in 2008-9. As a consequence, vacancy rates
could not fall any further when the second recession began in 2011. Thus, the
Euro area unemployment and unfilled vacancies
%, scale inverted

%
Unemployment rate

6

3.0

7

2.5

8

2.0

9
1.5
10
1.0

11
Vacancy rate

12

0.5

13

0.0
03

Source: Eurostat

05

07

09

11

13

15
9

David Mackie
(44-20) 7134-8325

03 February 2014

rightward move in the Beveridge curve may be more a reflection of the way the data
are constructed rather than a genuine deterioration in labor market mismatch.
Regarding mismatch, we have focused thus far on the issue of skills. There is also the
issue of geographic mismatch. A combination of large cross-country divergences in
labor market conditions, unemployed individuals who are either unwilling or unable
to move and asymmetries in wage developments would represent a de facto increase
in the Euro area natural rate of unemployment, even if there were no increase in any
individual country NAIRU. It is certainly true that the dispersion of unemployment
across countries has increased sharply since 2008. Whether this represents a de facto
rise in the regional NAIRU depends on how asymmetric wage developments are
between the core and the periphery.
Aside from the question of unemployment, and whether the unemployed have the
right skills or are in the right location, there is also the issue of the underutilization of
either the employed or the economically inactive. Eurostat now provide data to
examine these issues. Unfortunately, the data only go back to 2008, so it is not
possible to examine the behavior of the labor market in the last business cycle.
One measure of underutilization concerns part-time workers who would like to
work more hours or who would like to work full time. Since 2008, there has been a
1.4 million increase in the number of individuals who would classify themselves in
this way. This increase is worth 0.9%-pts of the labor force. To the extent that these
individuals are working shorter hours within the same firm, this indicates a capacity
for output to grow without tightening the labor market.
Other measures of underutilization concern individuals who are currently classified
as inactive, but are either seeking work but not immediately available to take up
work or are immediately available to take up work but are not seeking work. The
latter would include discouraged workers. According to the Eurostat data, the
number of individuals who are classified as economically inactive but are close to
joining the labor force has increased by around 1.5 million since 2008. This increase
is worth 0.9%-pts of the labor force.

The utilization of capital
The European Commission survey also provides information on the utilization of
capital: capacity utilization in manufacturing and the number of firms reporting that
equipment shortages are limiting production in both manufacturing and services.
During the 2008-9 recession, capacity utilization in manufacturing fell 14.2%-pts
reflecting the 21% decline in manufacturing output. It then rebounded by 12.1%-pts
from the autumn of 2009 to the middle of 2011 as the level of manufacturing output
recovered by 15.3%. Capacity utilization then fell again as the economy went back
into recession, and has been recovering in recent quarters as output has risen.
Capacity utilization does look elevated relative to the level of unemployment, but
that reflects developments in manufacturing output relative to developments in GDP.
The key issue is the extent to which capacity utilization is high relative to the level of
manufacturing output. It is to some extent. A simple model estimated over the period
1985-2009 does suggest that the rebound in capacity utilization in 2010-11 was
stronger than previous experience would have suggested. In addition, the current
level of capacity utilization is a bit higher than the model would predict. These
developments imply some degree of structural deterioration. But, in terms of the
level, the latest reading of 80.0 is still below the average of 81.8 seen from 19852007.
Meanwhile, the number of firms in manufacturing reporting that equipment is a
constraint on production stands at a low level, although it has been rising in the past
10

David Mackie
(44-20) 7134-8325

03 February 2014

few quarters. It is also noticeable that the low level of equipment shortages in
manufacturing is relatively broad based across countries, even in Germany where
output gains in manufacturing have been much stronger than in the rest of the region.
In the service sector, the number of firms reporting equipment or space shortages as a
constraint on production is very low, although there is much less history to these
data. In contrast to the situation in manufacturing, there is more heterogeneity in
services. In Germany, shortages look high relative to the short history of the data.
Elsewhere, with the exception of France and the Netherlands, these data have moved
close to the zero nominal bound where very few firms in the services sector are
reporting equipment and space shortages as a constraint on production. As with labor
shortages, this means that these data are not a reliable guide to the amount of slack in
the economy.
An important issue with both capacity utilization and equipment shortages concerns
mothballed production facilities, which may be substantial after a deep recession. To
the extent that these are slow to be brought back on stream, this can cause a spike in
measures of resource utilization if demand recovers sharply. This may explain the
spike in equipment shortages in manufacturing in late 2010. Assuming that
mothballed production facilities can eventually be brought back on stream, shortterm movements in these measures of the utilization of capital may be misleading.
Euro area equipment shortages in manufacturing and unemployment
%, bal

%, scale inverted
7

Unemployment rate

14

8
9

9
10

4

11
Equipment shortages

-1

12
13

-6
95

00

05

Source: Eurostat and European Commission

10

15

Euro area equipment shortages in services and unemployment
%, scale inverted
7

%, bal
2.5

Unemployment rate

8

2

9

1.5

10
1

11
Equipment shortages

0.5

12
13

0
03

05

07

Source: Eurostat and European Commission

09

11

13

15
11

David Mackie
(44-20) 7134-8325

03 February 2014

The behavior of inflation
Given that, in the long run, inflation is the final arbiter of an economy’s supply side
performance, it is natural to look at the behavior of inflation as a guide to
developments on the supply side. Over the past few years, Euro area core inflation ex
taxes has been very choppy. It fell from a peak of around 2% in 2008 to below 1%
after the first recession in 2008-9, only to rise back up to 1.5% in the recovery from
mid 2009 to mid 2011. This pick-up supported views of significant structural
deterioration. Indeed the European Commission puts the output gap in 2011 at only
-1.1%, even though the level of GDP in that year was still 1% lower than in 2008.
Core inflation ex taxes has more recently fallen to below 1%. Official institutions
like to use a Kalman filter methodology to derive time varying NAIRUs as a key
input into their assessment of supply side performance. Essentially, if a given rise in
unemployment delivers less disinflation than in the past, this methodology suggests
that the natural rate of unemployment has risen.
Unfortunately, this approach is fraught with problems, which can be illustrated using
the simple equation on the adjacent page. In most Phillips curves, inflation is
determined by some combination of past inflation, inflation expectations, the output
gap, and external developments. External developments cover the currency, imported
goods prices, and commodity prices. Using the Kalman filter to estimate a time
varying NAIRU essentially assumes that all the other features of the Phillips curve
are unchanged over time. This is unlikely to be true. Increased central bank
independence has likely increased the coefficient on inflation expectations (anchored
at the central bank’s inflation objective) and reduced the coefficient on past inflation.
Greater nominal rigidities at lower inflation rates have likely reduced the coefficient
on the output gap as the level of inflation has declined dramatically over recent
decades. The coefficient on the output gap has likely been depressed further by
globalization effects as increased trade and capital mobility has limited the pricing
power of domestic firms and the bargaining power of domestic labor.
Euro area core inflation ex taxes
% oya
2.5

2.0

1.5

1.0

0.5
04

06

08

10

12

14

Source: Eurostat

The impact of changing the shape of the Phillips curve can be illustrated in the
calculations in the following table. Let’s imagine a simple Phillips curve with some
weight on past inflation, some weight on inflation expectations anchored at the
central bank’s objective and some weight on the output gap. Scenario 1 shows the
impact of a 2%-pt shock to the output gap when past inflation and inflation
expectations have an equal weight of 0.5 and the coefficient on the output gap is 0.2.
In this situation, inflation declines to 1.2% and will remain there until the output gap
shock fades. Now imagine a change in the world where central bank credibility
12

03 February 2014

David Mackie
(44-20) 7134-8325

Scenarios using simple Phillips curves
Coefficient on past inflation
Coefficient on inflation expectations
Coefficient on output gap
Years
0
1
2
3
4
5
6
7
8
9
10

0.5
0.5
0.2
Inflation expectations
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00

Output gap
0.00
-2.00
-2.00
-2.00
-2.00
-2.00
-2.00
-2.00
-2.00
-2.00
-2.00

0.25
0.75
0.1

Scenario 1
2.00
1.60
1.40
1.30
1.25
1.23
1.21
1.21
1.20
1.20
1.20

Scenario 2
2.00
1.80
1.75
1.74
1.73
1.73
1.73
1.73
1.73
1.73
1.73

0.5
0.5
0.2
Output gap
0.00
-0.60
-0.60
-0.60
-0.60
-0.60
-0.60
-0.60
-0.60
-0.60
-0.60

Scenario 3
2.00
1.88
1.82
1.79
1.78
1.77
1.76
1.76
1.76
1.76
1.76

Source: J.P. Morgan

increases the coefficient on inflation expectations (to 0.75) and where nominal
rigidities and globalization reduce the coefficient on the output gap (to 0.1). In this
scenario, inflation will fall to 1.7%. A Kalman filtering approach which fails to
recognize the change in the structure of the Phillips curve will assume that the shock
to the output gap was only 0.6%-pt, because it will assume that the more moderate
decline in inflation is due to a structural deterioration in the labor market (scenario
3). But, of course, we know that the actual shock to the output gap was 2%-pt all
along. Thus, when the structure of the Phillips curve is evolving, inflation
developments over the short term cannot be used as a good guide to the structural
state of the economy, in our view.

Putting it all together
Calibrating the state of the supply side in real time is very difficult. The European
Commission estimates that the natural rate of unemployment has risen by 2.2%-pts
since 2007. Our judgment is that the rise has been smaller than that, for four reasons.
First, the experience of the last business cycle indicates that the long-term
unemployed can be absorbed back into employment with little wage pressure. This
suggests that it is incorrect to assume that the majority of the long-tem unemployed
are structurally unemployed. Second, that at a time of structural change the use of the
Kalman filter to estimate a Phillips curve with a time varying NAIRU is likely to
overestimate the extent of the rise in the NAIRU. Third, the problem with the zero
nominal bound means that the breakdown in the relationships between
unemployment on one hand and skills shortages and vacancies on the other hand may
be more apparent than real. And fourth, structural reform over recent years is likely
to have contributed to better functioning labor markets.
While recognizing the difficulties highlighted above, we have also estimated Phillips
curves with time-varying NAIRUs in order to help our understanding of what is
going on (see: Explaining the stickiness of Euro area core inflation, Global
Datawatch, April 26, 2013). If the NAIRU is allowed to vary and all the other
coefficients are held constant, then indeed the model wants to predict a rise in the
NAIRU over the last five years. Our model points to an increase of around 1.5%-pts,
albeit from a higher level than we are assuming here. But, it also possible to estimate
a model where the NAIRU is held constant and the coefficient on the unemployment
13

David Mackie
(44-20) 7134-8325

03 February 2014

gap (the difference between unemployment and the NAIRU) is allowed to vary. In
this model, the coefficient on the unemployment gap would decline by between a
quarter and a half. This is a plausible estimate of the possible change in the shape of
the Phillips curve over recent years. Most likely the truth is somewhere in between:
some rise in the NAIRU and some flattening in the shape of the Phillips curve.
We have also looked at a quantitative indicator of labor market structure (the Fraser
Institute index of labor market regulations) and a survey-based indicator of labor
market structure (the World Economic Forum labor market efficiency index) in order
to see how natural rates of unemployment are influenced by labor market structure.
There is clearly some relationship (see: The institutional structure of Euro area labor
markets, Global Datawatch, February 28, 2013). The evolution of these indicators
would suggest very modest movements in natural rates of unemployment over recent
years. The table on the following page shows the European Commission’s estimates
of the natural rate of unemployment (which they call the non-accelerating wage rate
of unemployment – NAWRU) and the predictions for 2011 and 2013 based on the
relationships that existed in 2007. (The latest data from the Fraser Institute refer to
2011 and the latest data from the World Economic Forum refer to 2013.) These
simple models show a sharp decline in the natural rate of unemployment in Germany
and a significant rise in Portugal, but elsewhere movements are fairly modest. The
dramatic rise in the European Commission’s estimate of the natural rate of
unemployment in Spain, from 11.7% in 2007 to 23.2% in 2013, is not evident in
these data.
It seems clear to us that the European Commission’s estimate of the natural rate of
unemployment is too high. In addition to the arguments laid out above, another
reason to argue for a smaller increase in the area-wide natural rate concerns the
country level composition. With the natural rate of unemployment likely to have
declined in Germany in recent years, and to have remained stable in some of the
smaller countries, the Commission’s estimate of a 2.2%-pt increase in the Euro area
natural rate implies major increases in some of the peripheral countries. We do not
find it plausible that the Spanish natural rate of unemployment has risen by 11.5%pts since 2007 and now stands at 23.2%. But, what is the right estimate of the areawide natural rate of unemployment? Our working hypothesis is to assume a rise in
the natural rate of unemployment of around half of the Commission’s estimate. This
would imply an increase from 8% in 2008 to 9% currently, which would put the
output gap at around -6%. This would be to recognize some structural deterioration
Fraser Institute labor market regulations and the NAWRU
Fraser Institue labor maket regulation index 2007
8
IE
NL

7

BE
AT

6

IT

FR

ES

PT
5

EL

FI
DE

4
3
2

4

Source: Fraser Institute and European Commission

14

6

8

10
12
EC NAWRU 2007

03 February 2014

David Mackie
(44-20) 7134-8325

Implications of indicators of labor market structure
EC NAWRU

Predictions
From Fraser Institute

From World Economic Forum

2007

2011

2013

2007

2011

2007

2013

Germany

8.8

6.9

5.8

10.2

6.8

7.2

6.4

France

8.8

9.6

10.2

8.1

7.5

8.2

7.4

Italy

7.4

8.5

10.3

7.1

6.0

10.0

10.3

Spain

11.7

19.0

23.2

8.3

8.1

8.4

8.7

Netherlands

3.4

4.6

5.8

6.5

6.3

6.2

5.5

Belgium

7.7

7.7

7.9

6.1

5.4

8.4

7.3

Austria

4.3

4.4

4.5

7.2

6.9

6.8

6.5

Greece

10.1

15.4

19.3

9.1

9.6

9.7

9.3

Finland

6.9

6.9

7.1

8.5

7.9

6.0

5.5

Ireland

6.0

11.7

12.9

5.2

4.4

5.4

5.2

Portugal

9.3

12.7

15.2

8.3

8.7

8.0

9.2

Source: European Commission, Fraser Institute, World Economic Forum and J.P. Morgan

where the adjustments in the periphery may be causing an increase in mismatch,
especially in Spain and Ireland, where construction booms are deflating. It would
also take some account of improvements in the structure of labor markets.
Our view of the natural rate of unemployment can also be recast in terms of growth
potential. A 1% rise in the NAIRU since 2008 suggests that potential output has
grown by around 0.9% a year since then. This is higher than the European
Commission’s estimate. In our earlier work on growth potential, we decomposed
potential growth into three main components: the growth of labor productivity (GDP
divided by hours worked); the change in labor utilization (hours worked divided by
the working age population); and the contribution from demographics (the growth in
the working age population). (For a discussion of this work see: The long slide in
Euro area growth potential is likely to continue, Special Report, March 25, 2010.)
It is not possible to fully implement this approach to the past few years, because we
defined growth potential as the move in GDP between two periods with similar
utilization rates for labor and capital. Clearly, utilization rates are currently far away
from where they were at the last cyclical peak. Nevertheless, the table on the next
page shows a decomposition of how we might understand what is going on. The first
column shows the expectations of our original analysis for the current business cycle
as a whole. The second column shows the actual outturns in recent years. The third
column shows a way of explaining the European Commission’s view of growth
potential in recent years. The fourth column shows a way of explaining our view of
growth potential in recent years. As is evident in the table, the entire difference
between the Commission's view and our view relates to the natural rate of
unemployment. In this decomposition, a negative sign on the unemployment rate
shows less labor supply coming from a higher natural rate of unemployment.

The output gap and the monetary stance
In general, a commitment by a central bank to keep inflation in line with its objective
is equivalent to a commitment to ensuring a zero output gap. This means that
calibrating the output gap correctly is of major importance in determining the
appropriate monetary stance.

15

David Mackie
(44-20) 7134-8325

03 February 2014

The Taylor rule has proven to be an efficient and robust reaction function for
inflation targeting central banks, so it provides a useful starting point for thinking
about the appropriate monetary stance. If we assume that core inflation settles at
around 0.8%, that the output gap is -6% and that the equilibrium neutral policy rate is
3%, then the original Taylor rule (with a coefficient of 0.5 on the output gap) would
suggest that the appropriate policy rate in the Euro area is -1.8%. If we take a more
standard Taylor rule (with a coefficient of 1.0 on the output gap) then the appropriate
policy rate is -4.8%. Perhaps we should take something in between these estimates.
We also need to give some credit for the larger-than-normal balance sheet and the
OMT. Overall, it could be argued that the ECB’s monetary policy stance is around
200 basis points too tight, in our view.
The implications of the more pessimistic view of the supply side can be seen from
putting the European Commission’s estimate of the output gap into a Taylor rule. A
3% output gap would point to an appropriate policy rate of -0.3% (in the original
Taylor rule) or -1.8% (in the more standard Taylor rule). Depending on the
contribution from the balance sheet and the OMT, the ECB's policy stance may still
be too tight but to a much lesser extent than our estimate of the output gap would
suggest.

GDP decomposition
%
Expectations of
previous
analysis – full
cycle

Gross domestic product
Labor productivity
Labor utilization
Hours worked per employed
Unemployment rate
Participation rate
Demographics
Age structure
Total population

Actual outturn
– 2009-2012

Possible
explanation of
Commission's
estimate of
potential –
2009-2012

Possible
explanation of
JP Morgan's
estimate of
potential –
2009-2012

1.2
0.9
0.2
-0.3
0.1
0.4
0.1
-0.3
0.4

-0.4
0.6
-1.0
-0.4
-1.0
0.4
0.0
-0.3
0.3

0.6
1.0
-0.4
-0.3
-0.5
0.4
0.0
-0.3
0.3

0.9
1.0
-0.1
-0.3
-0.2
0.4
0.0
-0.3
0.3

Source: The Conference Board, European Commission, OECD and JP Morgan

Box: Explaining the decomposition
=

=

=

∙

∙

∙

∙

∙

GDP growth
Labor utilization

Demographics

Y is GDP, H is hours worked, PWA is the population of
working age, E is employment, N is the labor force and PTOT
is the total population.
16

David Mackie
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03 February 2014

We have to recognize the importance of uncertainty in measuring the output gap in
real time, and that this creates a challenge for central banks in setting the appropriate
monetary stance. Clearly, uncertainty means that central banks may end up doing
either too much or too little. Given the already low level of inflation, the risk of
hysteresis, and the risk of inflation expectations sliding, we believe the onus is on the
ECB to err on the side of doing too much. This is essentially what the Federal
Reserve and the Bank of England are doing: they are setting policy stances that are
easy relative to pre-crisis norms in order to limit hysteresis effects and the risk of
deflation. In contrast, the ECB is setting a policy stance in a way that looks to us too
tight relative to pre-crisis norms. We believe this is partly due to the ECB’s
pessimistic view of the supply side and partly due to the challenge of overcoming the
zero nominal bound. Some options at the zero nominal bound involve taking more
balance sheet risk (LTROs, asset purchases), while others involve taking on more
inflation risk (aggressive forward guidance). The ECB is reluctant to take on any
more risk, primarily due to concerns about moral hazard.

The output gap and the fiscal stance
Medium-term fiscal policy in the Euro area is now calibrated according to an
objective for the structural budget position, constrained to be a deficit of no more
than 0.5% of GDP. While we think it appropriate to focus on the structural budget
position, this does require an accurate estimate of the output gap. In its last set of
projections, the European Commission put the overall budget deficit estimate for
2013 at -3.1%. A -3% output gap estimate then put the structural deficit at -1.5%.
This means that austerity worth 1% of GDP is required to meet the medium-term
fiscal objective. If, instead, the output gap is actually -6%, this would reduce the
required fiscal austerity to nothing: essentially, the journey toward the structural
fiscal objective has already been reached for the region as a whole. This difference is
obviously noticeable in aggregate, but it is particularly important for some of the
individual peripheral countries. The Commission’s estimate for the Spanish output
gap of -5.2% puts the estimate of Spain’s structural budget deficit at -4.1% of GDP.
Assuming an Okun coefficient of 0.5, this would put the natural rate of
unemployment in Spain at around 24%. This impression is reinforced by the
projections that the Commission publishes, which put the Spanish output gap in 2015
at -0.7% of GDP when the unemployment rate is still expected to be 25.3%. This
very pessimistic view of the structural deterioration in Spain in recent years means
that Spain is being asked to do much more fiscal tightening than is appropriate, in
our view.

Consequences and tracking
A monetary stance that is too tight relative to a standard Taylor rule, and a degree of
fiscal consolidation that is greater than it need be, does not mean that the economy
cannot grow. And indeed the region has returned to growth over recent months.
Policy stances that are too tight relative to reaction functions like the Taylor rule
mean that the economy will not grow at a pace that will ensure that inflation returns
to the central bank’s objective over a two to three year horizon. Essentially, the ECB
is, in our view, tolerating a very slow journey back to price stability, something
which the central bank seems to recognize. This is evident in the extended-period
rhetoric and also in the financial markets. According to the inflation swaps market,
Euro area inflation will not return to 2% until 2020. With a very slow journey back to
price stability, unemployment will remain very elevated with all the attendant risks
of hysteresis.
Given the importance of gauging the path of slack accurately, it is reasonable to ask
how we can track different views. Unfortunately, this is easier said than done.
17

David Mackie
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03 February 2014

It might seem reasonable to look at inflation as a guide to the size of the output gap,
given the role of the supply-demand balance in influencing inflation in the long run.
And indeed, at first blush it would be reasonable to argue that if inflation remains at a
very low level for an extended period and then moves back toward the ECB’s price
stability target very gradually, this would suggest a greater output gap than the ECB
and EC are assuming. But, there are other influences on inflation that may muddy the
waters in the short term, which means that inflation is not a perfect guide to the
supply side over short periods of time. Nevertheless, if out view regarding the output
gap is correct, then the journey back to the ECB’s price stability objective will take
much longer than the central bank currently expects.
If our judgment about the size of the output gap is correct then it should take a long
while before measures of labor shortages and vacancies start moving across the
periphery. If the zero nominal bound has been important in these variables, then
presumably the labor market can improve considerably before any labor shortages
and any vacancies are registered. The gap between the unemployment rate and these
other measures of labor utilization should then gradually close. Essentially, the
apparent rightward move in the Beveridge curve should be partially reversed in the
coming years.
Normally, the passage of time helps us to choose between competing hypotheses.
Unfortunately, this may not be true in this situation. To the extent that there is some
endogeneity between the supply side and the demand side, ex ante judgments about
this endogeneity will significantly influence ex post realizations. For example, if the
supply side is stronger in the face of better demand conditions, then an ex ante
judgment by policy makers that this will happen will ensure that the economy
achieves an equilibrium path with a better profile for both demand and supply. But, if
the ex ante judgment by policy makers is that the supply side is not related to
demand, then, even if that judgment is incorrect, policy will be set in a manner that
makes it likely that the economy will achieve a different equilibrium path with a
worse profile for both demand and supply. Ex post it will not be possible to
determine which ex ante view was correct.

18

03 February 2014

David Mackie
(44-20) 7134-8325

Annex 1: The zero nominal bound in skill shortages and
vacancies in the periphery
Italy skill shortages in manufacturing and unemployment
%, scale inverted

Italy skill shortages in services and unemployment
%, bal

4

12

Unemployment

%, scale inverted

%, bal

4

12

Unemployment

10
6

8
6

8

10

6
8

8
6
4

4
2
Skill shortages

12

10

0

10

12

2
0
Skill shortages

-2
14

-4
85

90

95

00

05

-2

14

-4
03

10

05

07

09

11

13



Spain skill shortages in manufacturing and unemployment

Spain skill shortages in services and unemployment

%, scale inverted

%, scale inverted

%, bal

Unemployment

5

5

10

%, bal
6

Unemployment

5

4

10

15

4

3

15

2
20

3

20

2

1

-1
97

99

01

03


05

07

Skill shortages

0

30
95

1

25

Skill shortages

25

09

11

13

30
2008

2009

2010

2011

2012

0
2013

-1
2014


19

03 February 2014

David Mackie
(44-20) 7134-8325

Portugal skill shortages in manufacturing and unemployment
%, scale inverted

%, bal

0

15

Spain vacancy rate and unemployment
%, scale inverted

%

15

1.6
Unemployment

Unemployment

1.4

5
10

1.2
20

1.0

10

0.8
5
Skill shortages

15

0.6

25

0.4

Vacancy rate

0.2
20

0
90

95

00

05

10


30
2009

2010

2011

2012

2013

0.0
2014

Source: Eurostat

Italy vacancy rate and unemployment

Portugal vacancy rate and unemployment
%, scale inverted

%

%, scale inverted

0.8
0.7

6

0.6

7

8

0.5

8

10

0.4

9

0.3

10

0.2

11

0.1

12

0.0

%

5

13

0
Unemployment

2
4
6

12

Vacancy rate

14
16
18
20
01

03

Source: Eurostat

20

05

07

09

11

13

15

1.4
Unemployment
1.2
1.0
0.8
0.6
0.4

Vacancy rate

0.2
0.0
04

06

Source: Eurostat and Istat

08

10

12

14

03 February 2014

David Mackie
(44-20) 7134-8325

Annex 2: The relationship between skill shortages and
unemployment in the core
Belgium skill shortages in manufacturing and unemployment

Germany skill shortages in services and unemployment
%, scale inverted
4

%, bal
25
Unemployment

20

6

%, inverted scale
6

%, bal
16

Unemployment

14
7

12

15

10

8
8

8

10
5

10

Skill shortages
0

12

-5
03

05

07

09

11

4

10

2

Skill shortages

0

11

-2
85

13


6

9

90

95

00

05

10

Source:European Commission and Eurostat

Netherlands skill shortages in manufacturing and unemployment

France skill shortages in services and unemployment
%, scale inverted
7

%, bal
20

Unemployment
8

%, scale inverted

%, bal

2

15

3

9

10
5

12

4

10

14

6

5

4
2

0

12

-5
03

05

07

09

11

13

0

Skill shortages

7


10
8

6

Skill shortages

11

Unemployment

-2

8

-4
85

90

95

00

05

10


21

03 February 2014

David Mackie
(44-20) 7134-8325

Annex 3: Estimates of structural unemployment at the
country level
Estimates of structural unemployment
%
OECD NAIRU

EC NAWRU

JPM NAIRU

2007

2013

2007

2013

2007

2013

Euro area

8.5

10.1

8.6

10.8

8.0

9.0

Germany

7.7

6.5

8.8

5.8

8.0

6.0

France

8.5

9.2

8.8

10.2

8.7

9.2

Italy

7.4

9.5

7.4

10.3

7.4

9.5

Spain

13.5

21.4

11.7

23.2

10.0

15.0

Netherlands

3.8

3.9

3.4

5.8

3.6

4.5

Belgium

8.0

7.9

7.7

7.9

7.9

7.9

Austria

4.3

4.3

4.3

4.5

4.3

4.4

Greece

10.8

15.6

10.1

19.3

10.4

15.0

Finland

7.9

7.2

6.9

7.1

7.4

7.1

Ireland

7.6

10.6

6.0

12.9

6.8

9.0

Portugal

8.1

12.0

9.3

15.2

8.5

12.0

Source: OECD, European Commission and J.P. Morgan

22

David Mackie
(44-20) 7134-8325

03 February 2014

Recent J.P. Morgan Global Issues
India in 2014: five questions that keep us awake, Sajjid Chinoy, Toshi Jain, January
2014
We will grow, but can we heal? 2014 global economic outlook, Bruce Kasman,
David Hensley, Joseph Lupton, December 2013
Ten questions about China, Haibin Zhu, Grace Ng Lu Jiang, December 2013
Enjoying the interval in the Euro area drama, Mackie et al, October 2013
US future isn’t what it used to be: potential falls below 2%, Michael Feroli, Robert
Mellman , August 2013
Job gains to lag global growth lift, Bruce Kasman, Joseph Lupton, David Hensley,
July 2013
BoJ to succeed by failing to hit its inflation goal, Masaaki Kanno, Masamichi
Adachi, Tohru Sasaki, July 2013
China’s financial sector: Concerns about mounting risks, Haibin Zhu, Grace Ng, Lu
Jiang, July 2013
The challenge of very low inflation in the Euro area, Brun-Aguerre, et al, July 2013
The Euro area adjustment: about halfway there, Mackie, et al, May 2013
Beyond “whatever it takes”: ECB policy changes in the year ahead, Mackie, Barr,
Fuzesi, Feb 2013
More growth, less fear: 2013 global economic outlook, Kasman, Hensley, Lupton,
Jan 2013
The time is always now: introducing J.P. Morgan’s global nowcaster, Lupton,
Hensley, Kasman, Brun-Aguerre, September 2012
Moving towards a much larger ECB balance sheet, Mackie, Wadhwa, Normand,
July 2012
Global impact of the Euro area crisis, Kasman, Hensley, Lupton, June 2012
Global manufacturing puts in overtime as other sectors dawdle, Kasman, Hensley,
Lupton, May 2012
The Euro area’s painful path to Eurobonds, David Mackie, Malcolm Barr, Nicola
Mai, February 2012
Global economic outlook 2012: let’s get cyclical, Bruce Kasman, Joseph Lupton,
David Hensley, Jan 2012
Japan well on its way to becoming a capital importer, Masaaki Kanno, January 2012
Nowhere to hide: EM decelerating alongside US and Euro area, Joseph Lupton,
David Hensley, Luis Oganes October 2011
Wagging the dog: powerful swings in EM inflation spill over to DM, J. Lupton, D.
Hensley, July 2011
Global repercussions from the Japanese earthquake, Joseph Lupton, David Hensley,
March 2011
A way out of the EMU fiscal crisis, Joseph Lupton, David Mackie, December 2010
Stuck in a low inflation rut, Joseph Lupton, David Hensley, October 2010

23

David Mackie
(44-20) 7134-8325

03 February 2014

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