The equilibrium rate of unemployment in the Netherlands

The rise in unemployment in the 1970s and its subsequent persistence have challenged the conventional wisdom embodied in the standard Phillips curve, namely that equilibrium unemployment is fairly constant over time. This paper attempts to explain the apparent non-constancy of equilibrium unemployment by developing and estimating a structural model in which equilibrium unemployment is endogenous and results from the interactions of wage bargaining and the price and employment determination of firms. We find that the three major determinants of equilibrium unemployment are tax rates, the replacement rate and the real interest rate. The rise in unemployment in the 1970s and early 1980s was mainly due to a rise in the first two factors. That equilibrium unemployment remained high when tax rates and the replacement rate were reduced in the 1980s and early 1990s is attributed to the rise in real interest rates during this period.