Equilibrium unemployment in France: An assessment

This paper makes a theoretical and empirical investigation of the assumption that the real interest rate has a permanent effect on the equilibrium unemployment rate. The model extends the Layard-Nickell-Jackman standard wage bargaining framework (1991), which is parameterised by the capital stock by including the long-run optimal capital stock determined by the real worldwide interest rate in a small open economy. This framework proves to be a very useful way to assess the role of productivity and interest rates in the rise of European equilibrium unemployment. We use the Johansen procedure to estimate and identify, on quarterly French data, the cointegration relations suggested by the theoretical model. Although the robustness of the results has to be confirmed, the model is not rejected by the data. We conclude that the rise of equilibrium unemployment in France since 1974 may result from the increase of both the tax wedge and real interest rates.