What's 'structural' about unemployment in Europe: On the Determinants of the European Commission's NAIRU Estimates

This paper analyzes the determinants of the European Commission's NAIRU estimates for 14 European OECD countries during 1985-2012. The NAIRU is a poor proxy for 'structural unemployment': Labor market institutions - employment protection legislation, union density, tax wedge, minimum wages - underperform in explaining the NAIRU, while cyclical variables - capital accumulation and boom - bust patterns in housing markets - play an important role. This is relevant since the NAIRU is used to compute potential output and structural budget balances and, hence, has a direct impact on the scope and evaluation of fiscal policy in EU countries.