^aDepartment of Economics, Delft University of Technology, Room c.0.040, Jaffalaan 5, Delft 2628 BX, The Netherlands

Correspondence: Servaas Storm, E-mail: s.t.h.storm@tudelft.nl

Abstract

We argue that the conventional NAIRU (non-accelerating inflation rate of unemployment) model is a special case of a larger model of equilibrium unemployment, in which demand, investment, and endogenous technological progress do have lasting effects on steady-inflation unemployment. It follows that the labor market policy prescriptions (i.e. to drastically deregulate), following from the conventional NAIRU model, cannot be generalized. Empirical support for the extended model is provided by an econometric analysis for 20 OECD countries (1984–2004): demand factors are the dominant determinants of OECD unemployment.