Structural unemployment vs. NAWRU : implications for the assessment of the cyclical position and the fiscal stance

This paper discusses the fiscal policy implications of applying an alternative output gap methodology. The alternative methodology replaces the NAWRU by the structural unemployment rate (SUR) estimated by DG ECFIN in the calculation of potential GDP. The note studies how the use of this method changes the properties of trend and cyclical variables and it analyses the properties of the estimated structural fiscal balance and fiscal effort for the EA12. The results suggest that the SUR-based potential growth and structural balance are somewhat less procyclical than the standard potential growth and structural balance. They are also somewhat less affected by forecast revisions at the end of the sample, i.e. the period relevant for fiscal policy. Also, the SUR-based indicators suggest worse underlying economic conditions in relatively good times and better underlying economic conditions in relatively bad times than the NAWRUbased indicators. Thereby, they tend to show a less favourable structural fiscal position in good times and a more favourable one in bad times. Quantitatively, differences in indicators are found to be larger for Member States which had sizeable fluctuations in the unemployment rate over the past decade. Given its different concept of the cycle and the trend component, other things equal, the SUR-method would provide incentives to accommodate highly persistent shocks (e.g. hysteresis), while the standard method considers these to be beyond the scope of fiscal policy.