ABSTRACT OF PAPER
Title: From zero to 20 percent: a historical account of the empirical measure of unemployment corresponding to full employment
Author: Palumbo Antonella
The purpose of this paper is to offer a historical reconstruction of the way the theoretical notion of full employment, and the related empirical measures, have changed in time. From the theoretical point of view, the historical excursus will allow to analyze the gradual shift of the policy target from full employment to equilibrium unemployment, the latter supposedly identified on the basis of a quite regular relationship between unemployment and inflation. Three main conceptual frameworks will be analyzed and discussed: a) Keynes s notion of full employment; b) the different notions of target unemployment associated with the original Phillips curve; c) the natural rate of unemployment deriving from the vertical Phillips curve. Some relevant theoretical shifts are identified, first in the Phillips curve which blurred the clear-cut definition of full employment, then in the change in interpretation due to Lipsey (1960), who introduced some very relevant changes with respect to Phillips (1958) original theoretical explanation of his curve, finally in the subsequent reinterpretation and correction of the Phillips curve due to Friedman (1968) and his definition of the natural (or full-employment) rate of unemployment. Also from the empirical point of view, relevant shifts may be detected in applied policy literature as regards the empirical identification of full employment (or equilibrium unemployment), which correspond at least in part with the changes in the theoretical consensus. Notwithstanding Tobin s famous remark about the proper measure of the optimal unemployment rate to be set at zero percent, also in policy-oriented analyses in which full employment was an explicit objective, the actual policy target was rarely, if ever, set at zero percent, due to the necessity of taking account empirically of some ineliminable or frictional unemployment. The empirical measures of target unemployment were however usually not above 4 percent. Some instances will be analyzed of this literature, starting from Beveridge (1944). Such empirical measures will be contrasted with the measures of natural unemployment or NAIRU offered by the applied literature currently produced by international economic institutions, which basically founds on Friedman s vertical Phillips curve. Due to both the theoretical foundations and the estimation methods currently adopted, such analyses have ended up producing, for some European countries particularly hit by the crisis, measures of the equilibrium rate of unemployment above 20 percent.
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