By Richard Barwell
According to conventional textbook analysis, when unemployment falls below its natural or equilibrium rate wage inflation starts to rise. However, over the past few years UK unemployment has fallen well below what was thought to have been its natural rate and yet wage inflation has remained subdued. One possible explanation for this is that the natural rate of unemployment itself has fallen. Explanations for such afall have included a decline in union bargaining power, reduced generosity of unemployment benefits, and deregulation of labour markets. This paper investigates a further explanation, namely that the fall in equilibrium unemployment is due to the changing age structure of the workforce. In particular, the paper investigates the hypothesis that a decline in the proportion of youths in the labour force has reduced the equilibrium unemployment rate.