The NAIRU and the Extent of the Low-Pay Sector

The creation of jobs in the low-pay sector is considered to be an approach to reduce unemployment, especially with respect to low-skilled workers. By now, the expansion of the German low-wage sector over the last 15 years is empirically confirmed, which indicates a successful implementation of corresponding recommendations from policy advisers. In order to evaluate the effects of an increasing low-wage sector on unemployment, the concept of the non-accelerating inflation rate of unemployment (NAIRU) is used. In a first step, the unobservable, exogenous NAIRU is estimated for Germany in a state space setting. In a second step, data from the German Socio-Economic Panel (SOEP) is used to calculate a time series of the extent of the low-pay sector. Finally, by treating the NAIRU as the dependent variable, the impact of the low-wage share is estimated within an error correction framework. According to the proponents of the low-pay expansion, there should be a negative relationship between the NAIRU and the share of the low-wage sector. This hypothesis is rejected empirically. Indeed, for the time after the German reunification, cointegration is found between both variables suggesting a slightly positive relationship.