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Natural unemployment and activity rates: flow-based determinants and implications for price dynamics

Author

Listed:
  • Francesco D'Amuri

    (Bank of Italy)

  • Marta De Philippis

    (Bank of Italy)

  • Elisa Guglielminetti

    (Bank of Italy)

  • Salvatore Lo Bello

    (Bank of Italy)

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.

Suggested Citation

  • Francesco D'Amuri & Marta De Philippis & Elisa Guglielminetti & Salvatore Lo Bello, 2021. "Natural unemployment and activity rates: flow-based determinants and implications for price dynamics," Questioni di Economia e Finanza (Occasional Papers) 599, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_599_21
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    References listed on IDEAS

    as
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    Cited by:

    1. D’Amuri, Francesco & De Philippis, Marta & Guglielminetti, Elisa & Lo Bello, Salvatore, 2022. "Slack and prices during Covid-19: Accounting for labor market participation," Labour Economics, Elsevier, vol. 75(C).
    2. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    3. Giacomo Caracciolo & Salvatore Lo Bello & Dario Pellegrino, 2021. "An assessment on the potential impact of COVID-19 on the Italian demographic structure," Questioni di Economia e Finanza (Occasional Papers) 622, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    labour market flows; labour supply; demographic trends; phillips curve; business cycles;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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