Production function approach to calculating potential growth and output gaps : estimates for the EU Member States and the US.
Date: 2003-09-10
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: European Union, United States, euro area, production, production policy, production statistics

EUROPEAN
ECONOMY

EUROPEAN COMMISSION

DIRECTORATE-GENERAL FOR ECONOMIC
AND FINANCIAL AFFAIRS

ECONOMIC PAPERS

http://europa.eu.int/comm/economy_finance

N° 176 - September 2002

Production function approach to
calculating potential growth and output
gaps – estimates for the EU Member States
and the US
by
Cécile Denis, Kieran Mc Morrow and Werner Röger
Directorate General for Economic
and Financial Affairs

Economic  Papers are  written by  the  Staff  of  the  Directorate-General  for
Economic and Financial Affairs, or by experts working  in  association  with
them. The "Papers" are intended to increase awareness of the technical work
being done by the staff and to seek comments and suggestions for further
analyses. Views expressed represent  exclusively  the  positions  of  the  author
and  do  not necessarily correspond  to  those  of  the European  Commission.
Comments and enquiries should be addressed to the:

European Commission
Directorate-General for Economic and Financial Affairs
Publications
BU1 - -1/180
B - 1049 Brussels, Belgium

The  authors  are  economists  in  the  Directorate-General  for  Economic  and
Financial Affairs (ECFIN) of the European Commission.

Acknowledgements  :  The  authors  would  like  to  thank  J.  Kröger,  A.
Dramais,  K.  Vernon,  J.  Fischer  and  all  of  the  country  desk  officers  in
Directorate B of DG ECFIN for valuable comments on earlier drafts of this
paper.

ECFIN/420/02-EN

This paper only exists in English.

©European Communities, 2002

PRODUCTION FUNCTION APPROACH TO CALCULATING POTENTIAL
GROWTH AND OUTPUT GAPS
- ESTIMATES FOR THE EU MEMBER STATES AND THE US -

TABLE OF CONTENTS

INTRODUCTORY REMARKS

SECTION 1    :  MEASUREMENT  OF  POTENTIAL  OUTPUT  USING  A  PRODUCTION
FUNCTION APPROACH

1.1 : OVERVIEW OF APPROACH
1.2 : NAIRU ESTIMATION METHOD

SECTION 2    :    POTENTIAL  OUTPUT  AND  OUTPUT  GAP  ESTIMATES  –  EU15,  EURO
ZONE AND US

2.1 : ESTIMATES FOR EU15, EURO ZONE  AND US – 1981-2003
2.2 : MEDIUM-TERM EXTENSION (2004-2006) – EU15 AND EURO ZONE

CONCLUDING REMARKS

REFERENCES

ANNEXES

ANNEX   1:  DETAILED TABLES AND GRAPHS FOR THE 15 EU MEMBER STATES

ANNEX   2:  COMPARATIVE TABLES AND GRAPHS FOR EU15, THE EURO ZONE AND THE

US

ANNEX  3:  HOURS  WORKED  :  ADJUSTMENT  OF  POTENTIAL  GROWTH  AND  ITS
COMPONENTS FOR HOURS WORKED PER PERSON EMPLOYED (EU15, EURO
ZONE AND THE US)

ANNEX   4:  CALCULATING MULTIPLIERS FOR INDIVIDUAL MEMBER STATES

INTRODUCTORY  REMARKS

CONCEPT  OF  POTENTIAL  OUTPUT 
:  Any  meaningful  analysis  of  cyclical
developments,  of  medium  term  growth  prospects  or  of  the  stance  of  fiscal  and
monetary  policies  are  all  predicated  on  either  an  implicit  or  explicit  assumption
concerning  the  rate  of  potential  output  growth.    Such  pervasive  usage  in  the  policy
arena  is  hardly  surprising  since  potential  output  constitutes  the  best  composite
indicator  of  the  aggregate  supply  side  capacity  of  an  economy  and  of  its  scope  for
sustainable,  non-inflationary,  growth.    Given  the  importance  of  the  concept,  it  is
hardly  surprising  that  the  measurement  of  potential  output  is  the  subject  of
contentious  and  sustained  research  interest.    Of  course  since  it  is  an  unobserved
variable, before starting to measure it one must firstly clarify exactly what one means
by the concept.  This concept signifies different things to different people, especially
when discussed  over various  time  horizons,  with  the concept  appreciated differently
when placed in a short, medium or long term perspective :
• 

In the short run (i.e. less  than  one  year),  the  physical  productive  capacity  of  an
economy  may  be  regarded  as  being  quasi  fixed  and  its  comparison  with  the
effective / actual output developments (i.e. in output gap analysis) shows by how
much total demand can develop during that short period without inducing supply
constraints and inflationary pressures.

• 

In  the  medium  term  (i.e.  over  the  next  five  years),  the  expansion  of  domestic
demand  when  it  is  supported  by  a  strong  upturn  in  the  amount  of  productive
investment may endogenously generate the productive output capacity needed for
its own support. The latter is all the more likely to occur when profitability is high
and either increased or supported by an adequate wage evolution with respect to
labour productivity.

•  Finally, in the long run (i.e. 10 years and beyond) the notion of full employment
potential  output  is  linked  more  to  the  future  evolution  of  technical  progress  (or
total factor productivity) and to the likely growth rate of labour potential.  For the
latter, the EU is paradoxically in a much better position than the US, thanks to its
present very low employment rate (with respect to the population of working age)
and its very high rates of structural and cyclical unemployment (as a proportion of
the active population).

These  medium  and  long  run  considerations  should  always  be  kept  in  mind  when
discussing  potential  output  since  the  latter  is  often  seen  in  an  excessively  static
manner in some policy making fora, where the growth of capacity is often presented
as invariant not only in the short run (where such an assumption is warranted) but also
over  the  medium  term  as  if  the  projection  of  fixed  investment  had  no  impact  on
productive capacity.

MEASURING  POTENTIAL  GROWTH  FOR  USE  AS  AN  OPERATIONAL  SURVEILLANCE
TOOL : Notwithstanding the importance of the concept, and the consequent desire for
clarity,  the  measurement  of  potential  growth  is  far  from  straightforward  and,  being
unobservable, can only be derived from either a purely statistical approach or from a
full econometric analysis.  It is clear however that conducting either type of analysis
requires a number of arbitrary choices, either at the level of parameters (in statistical
methods)  or  in  the  theoretical  approach  and  choice  of  specifications,  data  and
techniques  of  estimation  (in  econometric  work).    In  other  words,  all  the  available

3

methods have "pros" and "cons" and none can unequivocally be declared better than
the alternatives  in  all  cases.  Thus, what  matters is  to  have a method  adapted  to  the
problem  under  analysis,  with  well  defined  limits  and,  in  international  comparisons,
one that deals identically with all countries. This is the approach which is adopted in
the present  paper where the objective is to produce an economics based,  production
function,  method  which  could  be  used  for  operational  EU  policy  surveillance
purposes.

The preference for an economic, as opposed to a statistical, approach was driven by a
number of considerations.  For example, with an economics based method, one gains
the  possibility  of  examining  the  underlying  economic  factors  which  are  driving  any
observed changes  in the  potential  output  indicator  and  consequently  the  opportunity
of  establishing  a  meaningful  link  between  policy  reform  measures  with  actual
outcomes.  An additional advantage of using an economic estimation method is that it
is  capable  of  highlighting  the  close  relationship  between    the  potential  output  and
NAIRU  concepts,  given  that  the  production  function  (PF)  approach  to  calculating
potential output requires estimates to be provided of "normal" or equilibrium rates of
unemployment.    At  a  wider  level,  another  advantage  is  the  possibility  of  making
forecasts, or at least building scenarios, of possible future growth prospects by making
explicit  assumptions  on  the  future  evolution  of  demographic,  institutional  and
technological  trends.    However,  whilst  economic  estimation  would  appear  to
overcome,  at  least  partially,  many  of  the  concerns  in  terms  of  appraising  policy
effectiveness  which  are  linked  to  statistical  approaches,  on  the  negative  side
difficulties  clearly  emerge  with  regard  to  achieving  a  consensus  amongst  policy
makers on the modelling and estimation methods to be employed.  Policy makers are
fully  aware  of  these  latter  trade-offs  which  make  any  decision  making  process,
regarding  the  specific  details  of  the  PF  approach  to  calculating  potential  output,  a
difficult one to undertake in practice.

The PF estimates presented in this paper must therefore be assessed in the light of the
above set of predetermined requirements  and  given  the  difficult  trade-offs  involved.
Since the primary use of the methodology described in this paper is as an operational
surveillance tool in the assessment of the annual stability / convergence programmes
of  the  EU’s  Member  States,  it  was  important  that  the  methodology  respected  a
number of  basic  principles  given  the politically sensitive nature of the dossier.   The
main requirements from this PF approach is that it be a simple and fully transparent
methodology where the key inputs and outputs are clearly delineated and where equal
treatment  of  all  of  the  EU’s  Member  States  is  assured.    In  addition,  given  that  the
estimates are to be used for budgetary surveillance purposes, it was felt important to
take  a  prudent  view  regarding  the  assessment  of  the  past  and  future  evolution  of
potential growth in the EU.  In fact this was one of the explicit demands made when
policy makers called for a new method to be developed for assessing structural budget
balances  since  it  was  felt  that  past  surveillance  exercises  had  on  a  number  of
occasions  produced  an  excessively  optimistic  picture  of  the  degree  of  budgetary
improvement in the upswing phase of previous cycles.  This optimism was linked to
some  extent  with  the  cyclicality  of  the  trend  GDP  estimates  which  had  been
calculated  using  the  HP  filter  statistical  method  and  via  which  the  estimates  of
structural  budget  balances  had  been  generated.    Consequently  one  of  the  key
objectives  laid  out  for  the  new  PF  methodology  was  to  reduce  the  degree  of
cyclicality of the potential growth estimates to an absolute minimum in order to avoid

4

the mistakes of the past.  This bias towards a prudent or cautious view is evident in all
aspects  of  the  PF  estimation  process,  including  for  the  elaboration  of  the  medium-
term extension to the method for the period 2004-2006.

Finally, it should be stressed that the methodology described in the paper should not
be  seen  in  static  terms  since  there  is  a  strong  likelihood  that  specific  details  of  the
approach  will  continue  to  be  amended  in  the  years  to  come  on  the  basis  of  the
practical  experience  garnered  from  using  the  methodology  in  the  annual  budgetary
surveillance exercises.

STRUCTURE  OF  PAPER  :  In  terms  of  content,  the  paper  is  laid  out  as  follows.
Section 1 provides an overview of the PF methodology in conceptual terms, including
a  description  of  the  Kalman  Filter  inspired  NAIRU  estimation  method.    Section  2
goes on to present the results from applying the methodology to the EU15, the Euro
Zone  as  well  as  the  US.    A  description  of  the  results  produced  when  applying  the
medium term extension to the EU15 and Euro Zone aggregates is also presented.  In
the concluding remarks section of the paper, the issue of making future changes to the
methodology is tentatively explored, with some operating principles being suggested
which could form the basis for any such modifications.

5

SECTION 1  : MEASUREMENT OF POTENTIAL OUTPUT USING A PRODUCTION
FUNCTION APPROACH

1.1 OVERVIEW OF APPROACH
Instead of making statistical  assumptions  on  the  time  series  properties  of trends  and
their correlation with the cycle, the production function approach makes assumptions
based on economic theory. This latter approach focusses on the supply potential of an
economy and has the advantage of giving a more direct link to economic theory but
the disadvantage, as explained earlier, is that it requires assumptions on the functional
form of the production technology, returns to scale, trend technical progress and the
representative  utilisation  of  production  factors.    As  shown  in  graph  1,  with  a
production  function,  potential  GDP  can  be  represented  by  a  combination  of  factor
inputs, multiplied with the technological level or total factor productivity (TFP).  The
parameters of the production function  essentially  determine the  output elasticities of
the individual inputs.  With the Cobb-Douglas specification, it is necessary to estimate
the trend components of the individual production factors,  except capital.    Since  the
capital  stock  is  not  detrended,  estimating  potential  output  amounts  therefore  to
removing the cyclical component from both labour and TFP.

G R A P H   1   :   M E A S U R I N G   P O T E N T I A L
O U T P U T   U S I N G   A   P R O D U C T I O N   F U N C T I O N   A P P R O A C H

C O B B - D O U G L A S   P R O D U C T I O N   F U N C T I O N
C O B B - D O U G L A S   P R O D U C T I O N   F U N C T I O N
C O B B - D O U G L A S   P R O D U C T I O N   F U N C T I O N
C O B B - D O U G L A S   P R O D U C T I O N   F U N C T I O N

E M P L O Y M E N T

T O T A L   F A C T O R
P R O D U C T I V I T Y

C a p i t a l
S t o c k

E X T R A C T I N G   T H E
S T R U C T U R A L   C O M P O N E N T

L a b o u r   P o t e n t ia l

T o t a l   F a c t o r   P r o d u c t iv it y

W o r k i n g
A g e
P o p u l a t i o n

T r e n d
P a r t i c i p a t i o n
R a t e

S t a t i s t i c a l   T r e n d
M e t h o d
H P   F i l t e r e d   S o l o w
R e s i d u a l

L a b o u r
F o r c e

N A I R U

P o t e n t i a l
E m p l o y m e n t

6

1 : In more formal terms, with a production
COBB-DOUGLAS PRODUCTION FUNCTION
function, GDP (Y) is represented by a  combination of factor inputs - labour (L) and
)  and
the  capital  stock  (K)  -,  corrected  for  the  degree  of  excess  capacity  (
adjusted  for  the  level  of  efficiency  (
).    In  many  empirical  applications,
L EE ,
including  the  Quest  II  model,  a  Cobb  Douglas  specification  is  chosen  for  the
functional  form.    This  greatly  simplifies  estimation  and  exposition.    Thus  potential
GDP is given by:

L UU ,

K

K

(1)

=

Y

(
ELU
L

L

α
()

KEU
K

)

K

− =
α
1

α
KL

−
1

α

*

TFP

where total factor productivity (TFP), as conventionally defined, is set equal to :

(2)      

TFP

=

(

α
EE
L

α

−
1
K

)(

α
UU
L

α

−
1
K

)

which  summarises  both  the  degree  of  utilisation  of  factor  inputs  as  well  as  their
technological level.  Factor inputs are measured in physical units.  An ideal physical
measure  for  labour  would  be  hours  worked.    Unfortunately  this  information  is  not
available  for  all  Member  States  and  the  statistical  information  is  not  easily
comparable  across  countries.  Therefore  we  measure  labour  input  simply  by  the
number  of  employees.    This  implies  that  any  changes  in  working  time  will  be
reflected in the efficiency index.  For capital we use a comprehensive measure which
includes  spending  on  structures  and  equipment  by  both  the  private  and  government
sectors.

Various  assumptions  enter  this  specification  of  the  production  function,  the  most
important  ones  are  the  assumption  of  constant  returns  to  scale  and  a  factor  price
elasticity which is equal to one.  The main advantage of this assumption is simplicity.
However  these  assumptions  seem  broadly  consistent  with  empirical  evidence  at  the
macro level.  The unit elasticity assumption is consistent with the relative constancy
of  nominal  factor  shares.    Also,  there  is  little  empirical  evidence  of  substantial
increasing/decreasing  returns  to  scale  (see,  e.g.;  Burnside  et  al.  for  econometric
evidence).

The  output  elasticities  of  labour  and  capital  are  represented  by  α  and 
1( α−
)
respectively.  Under  the  assumption  of  constant  returns  to  scale  and  perfect
competition, these elasticities can be estimated from the wage share. The same Cobb-

1 CHOICE OF PRODUCTION TECHNOLOGY – WHY USE COBB-DOUGLAS ?  One of the big advantages of using Cobb-Douglas is
undoubtedly its simplicity, in that it is easy to make sense out of the coefficients imposed. The Cobb Douglas assumption greatly
simplifies  estimation  of  output  elasticities,  conditional  on  an  assumption  on  returns  to  scale.  With  a  high  average  degree  of
competition in the goods market, the output elasticities can be equated to their respective factor shares. Thus, there is only one
parameter to estimate.   While a large variety of views on alternative specifications to the Cobb-Douglas approach of constant
factor  shares  are  available,  one  needs  to  be  aware  of  the  implications  associated  with  these  alternatives.    For  example,  if  one
chooses to adopt an elasticity of less than 1, one is left with the problem of explaining why wage shares have fallen recently.  If
one goes for the alternative assumption of using an elasticity of greater than 1, then the lack of econometric evidence to support
using such a function needs to be taken into account.  Consequently, given the difficulties associated with the alternatives, the
Cobb-Douglas  assumption  of  unity  appears  to be  a  reasonable  compromise.    In  addition,  of  course,  if  one  were  to  use  a  CES
function with an elasticity of 0.8 or 1.2 the results would not differ very strongly from Cobb-Douglas.  Finally, the aggregation
problem associated with having a mixture of low and high skilled workers in the workforce would also appear to lend support to
the Cobb-Douglas view.  In this regard, if you aggregate over both sets of workers one would come close to Cobb-Douglas, with
low skilled workers having a high elasticity of substitution (EoS) with capital (EoS > 1) balancing out the low EoS associated
with high skilled workers (EoS < 1).  High skilled workers have generally a low EoS since such workers are regarded as being
more complementary to K.  This view regarding the distinction between low and high skilled workers is supported by a paper by
Krussell et al.  published in Econometrica in September 2000.

7

                                                
Douglas specification is assumed for all countries, with the mean wage share for the
EU15 over the period 1960-2000 being used as the estimate for the output elasticity of
labour, which gives a value of .63 for α for all Member States and, by definition, .37
for the output elasticity of capital.  While the output elasticity for labour may deviate
somewhat  from  the  imposed  mean  coefficient  in  the  case  of  individual  Member
States, such differences should not seriously bias the potential output results.

To summarise therefore, in moving from actual to potential output it is necessary to
define clearly what one means by potential factor use and by the trend (i.e. normal)
level of efficiency of factor inputs.

•  CAPITAL  :  With  respect  to  capital  this  task  of  defining  potential  factor  use  is
straightforward  since  the  maximum  potential  output  contribution  of  capital  is
given by the full utilisation of the existing capital stock in an economy. Since the
capital stock is an indicator of overall capacity there is no justification to smooth
this  series  in  the  production  function  approach.      In  addition,  the  unsmoothed
series is relatively stable for the EU and the US since although investment is very
volatile the contribution of capital to growth is quite stable since net investment in
any given year is only a tiny fraction of the capital stock figures.  In  terms of the
measurement  of  the  capital  stock,  the  perpetual  inventory  method  is  used  which
makes an initial assumption regarding the size of the capital / output ratio.

•  LABOUR  :  The  definition  of  the  maximum  potential  output  contribution  of
employment  is  more  involved  since  it  is  more  difficult  to  assess  the  "normal"
degree of utilisation of this factor of production.  Since there is no strict physical
limit, the definition that we therefore apply is the level of employment consistent
with  stable,  non  accelerating,  (wage)  inflation  (NAWRU)  -  (see  Section  1.2  for
details).  Potential  employment  is  generated  from  a  smoothed  labour  force  series
which is generated by applying a HP filtered participation rate to the working age
population figures.  With the smoothed participation rate leading to a less volatile
labour  force  series,  potential  employment  is  then  set  equal  to  the  labour  force
minus  the  NAIRU  estimates  for  the  respective  countries.  One  of  the  big
advantages  of  this  approach  is  that  it  generates  a  potential  employment  series
which is relatively stable whilst at the same time also providing for  year-to-year
changes  to  the  series  to  be  closely  linked  to  long  run  demographic  and  labour
market  developments  in  areas  such  as  the  working  age  population,  trend
participation rates and structural unemployment.

•  TREND EFFICIENCY : Within the production function framework, potential output
refers  to  the  level  of  output  which  can  be  produced  with  a  "normal"  level  of
efficiency of factor inputs, with this trend efficiency level being measured as the
HP filtered Solow Residual.

Normalising  the  full  utilisation  of  factor  inputs  as  one,  potential  output  can  be
represented  as follows :

(3)

P

Y

=

(

P
EL

T
L

α
()

KE

T
K

α

−
1)

.

8

1.2 NAIRU ESTIMATION METHOD

THE THEORETICAL MODEL
By  now  there  exists  a  large  literature  on  Kalman  Filter  estimates  of  the  NAIRU  or
alternatively the output gap or trend GDP.  A seminal contribution, using the Kalman
Filter  for  output  gap  estimation  is  Kuttner  (1994)  for  the  US.    Gerlach  and  Smets
(1999)  have  applied  a  variant  of  the  Kuttner  model  to  EMU  data.    A  prominent
reference  for  NAIRU  estimation  is  Gordon  (1997).    In  a  series  of  papers  Apel  and
Jansson (1999a,1999b) have applied this methodology to Sweden, the UK, the US and
Canada.  Recently, the OECD (2000) has taken up this approach for the estimation of
NAIRU’s  in  OECD  countries.    The  theoretical  specification  chosen  here  heavily
draws on the existing literature.

The  idea  behind  Kalman  filtering  when  applied  to  the  estimation  of  the  NAIRU  is
essentially the following.  Firstly, the unemployment rate is assumed to be composed
of  an  unobserved  cyclical  and  trend  component.    The  Kalman  Filter  extracts  these
components  subject  to  certain  general  specifications  of  the  processes  generating  the
cyclical and trend components.  Both components are, however, treated differently as
regards  the  economic  information  used.    No  attempt  is  made  to  model  the  trend
component  using  economic  information  which  could  potentially  explain  structural
shifts in the unemployment rate.  These factors are regarded as unobservable.  Instead
a  time  series  model  which  captures  the  general  statistical  properties  of  the
unemployment  trend,  such  as  the  non  stationarity  of  the  structural  component  is
specified.  More economic information is used for modelling the cyclical component
of unemployment.  Especially the link between changes in wage inflation and cyclical
unemployment  as  expressed  in  the  Phillips  curve  is  used  in  identifying  the  cyclical
component.  This section briefly outlines the model.

The observed unemployment rate (
component (

tC )

(1)

U

t

=

+
CT

t

t

.

tU ) is decomposed into a trend ( tT ) and a cyclical

interpretable,
this  decomposition  economically  meaningful  and 
To  make 
macroeconomic  theory  is  used  to  help  identify  the  cyclical  component.  For  this
purpose  a  Phillips  curve  relationship  is  postulated  which  links  the  change  in  wage
tC   plus  other  exogenous/predetermined
inflation  (
tX   such  as  lagged  changes  in  the  unemployment  rate  or  terms  of  trade
variables 
tu   which  can  be
shocks.  Other  unobserved  shocks  are  captured  by  the  error  term 
autocorrelated

)  to  the  unemployment  gap 

π∆
w
t

(2)

∆

γµπ
X

+

=

w
t

+

β

+
uC
t

t

t

with

u

t

=

I

(cid:1)

=

i

0

εθ
t
i

−

i

9

Besides  having  predictive  power  for  wage  inflation,  the  cyclical  component  of
unemployment must also obey certain business cycle restrictions:

• 

• 

• 

It should be an autocorrelated process, preferably second order.

It should be stationary.

It should have a sample mean of zero.

Such a process is characterised by the following equation

(3)

C

t

=

φ
1

C

−
1

t

+

φ
2

C

−

2

t

+

v

t

where  stationarity  requires 
.  Notice,  this  is  a  rather  parsimonious
specification.  More  economic  information  could  in  principle  be  used  to  specify  the
cyclical component.

1

+ φφ
2

1

<

Finally the model is closed by specifying the trend component.  No economic theory
is used here for the moment.  The trend component is simply modelled as a random
walk with drift

(4)

T
t

=

µ
t

+

T
t

−1

+

z

t

The drift term itself is allowed to follow a random walk

(5)

µµ
=
t

t

−1

a+

t

The drift term can either be a constant or itself a random walk. Both z and a are IID.
In the estimation results presented below we allow the drift term to be stochastic in all
cases. The rationale for choosing such a specification is the observed non-stationarity
of the unemployment rate.

ESTIMATION METHOD

The  equations  (1),  (2),  (3),  (4)  and  (5)  of  the  model  postulated  above  are  estimated
with maximum likelihood for each individual member state on  annual  data  over  the
period 1963 to 2003.  Both Newton type and simulated annealing algorithms are used
to  find  the  maximum  of  the  likelihood  function.  The  Newton  algorithm  has  the
advantage  of  being  fast  but  may  converge  to  a  local  maximum,  while  the  SA
algorithm searches for a global maximum. However, we also encounter an estimation
problem that has been noticed before, namely that certain assumptions regarding the
smoothness  of  the  NAIRU  need  to  be  made  a  priori  in  order  to  arrive  at  plausible
results.

SMOOTHNESS OF THE NAIRU: While with the Kalman Filter, the standard deviation
of the trend innovations can in principle be estimated, there exists the problem often
encountered in this literature that the estimated trends either appear too smooth or too
excessive.    In  practice  this  problem  is  often  overcome  by  fixing  the  variance  of  the

10

estimated  unemployment  trend  (see,  for  example  Gordon  (1997)  or  OECD  (2000)).
Gordon suggests a “smoothness prior” which allows the NAIRU to move “subject to
the  qualification  that  sharp  quarter  to  quarter  zig  zags  are  ruled  out.”  A  literature
survey conducted by the Bank of England (1998) arrives at the conclusion that values
for  the  variance  of  the  trend  innovation,  relative  to  the  inflation  innovation  in  the
range between .1 and .5 are usually chosen.  We have generally restricted the variance
of  the  trend  innovation  close  to  the  lower  bound  of  .1  in  order  to  generate  smooth
NAIRU series.  It must be noted that the likelihood function appears to be rather flat
with respect to alternative smoothness priors, i.e. a likelihood ratio test does not reject
this bound.  If one is interested in maximum smoothness there seems to be a criterion
which can be used, namely the stationarity requirement of the cyclical unemployment
component..  For each choice of the smoothing factor a unit root test for the cyclical
component can be carried out by transforming equation (3) into first differences

(3’’)

∆

C

t

=

φφ
+
(
2

1

−

)1

C

−
1

t

φ
∆−
2

C

−
1

t

+

v

t

and  testing  whether  the  coefficient  of  the  lagged  level  term  in  equation  (3’’)  is
significantly different from zero. The t statistics from this regression suggest that we
can reject non-stationarity. Therefore judged by this criterion the trend chosen for the
unemployment rate does not seem to be too smooth.

ESTIMATION RESULTS

The estimation results are contained in Tables 1a and 1b and are based on a broadly
harmonised  specification  across  countries,  with  a  uniform  sample  length  starting  in
1963 now applied.  As can be seen, for most countries, the results obey the theoretical
predictions of the model.  The unemployment  gaps have  clear cyclical properties  as
shown  by  an  estimated  stationary  AR(2)  process  (i.e.  a  second  order  autoregressive
process) with highly significant coefficients which  are  typical  for  cyclical  variables.
The coefficients in the Phillips curve equation always have the correct sign but they
are  not  always  significant  at  conventional  significance  levels.    However,  a  uniform
specification  that  would  be  valid  for  all  countries  could  not  be  found.  For  some
countries, notably the Scandinavian  countries,  the  change  of  the  unemployment  rate
seems  to  be  more  important  for  explaining  changes  in  wage  inflation  than  the
unemployment gap rate while for other countries the unemployment gap plays a more
crucial  role.  In  terms  of  the  actual  results,  a  comparison  with  the  NAIRU  estimates
from other international organisations reveals that the estimated unemployment trends
are  fairly  similar,  although  for  some  countries  there  are  differences  concerning  the
average level of the NAIRU, with ECFIN tending to be somewhat higher.  These level
differences  are  most  likely  due  to  the  fact  that  both  the  OECD  and  the  IMF  do  not
formally  impose  the  restriction  that  the  cyclical  unemployment  component  sums  to
zero over the sample period.

11

TABLE 1A: ESTIMATION RESULTS WITH ANNUAL DATA : KALMAN FILTER (1963-2003)

BELGIUM GERMANY DENMARK

SPAIN

FRANCE GREECE

IRELAND

PHILLIPS CURVE

CYCLICAL COMPONENT (-1)

-.55

-.26**

-.52*

-.41*

-.29**

-.29*

-.07*

UNEMPLOYMENT RATE (1. DIFF.)

-.47**

-.14(*)

-.54**

R**2

0.10

.25

.32

.23

.26

0.12

.20

IS CURVE

CYCLICAL COMPONENT (-1)

1.41**

1.25**

1.06**

1.47**

1.02**

1.53**

1.52**

CYCLICAL COMPONENT (-2)

-.60**

-.65**

-.52**

-.73**

-.11**

-.76**

-.54**

T-STATISTIC (UNIT ROOT)

-3.42

-4.73

-3.43

-5.14

-3.07

-4.23

-1.96

-2LOGLIKE

136.27

132.13

143.72

114.37

140.22

120.22

244.95

*   Denotes significance at the 10% level.
** Denotes significance at the 5% level

12

TABLE 1B: ESTIMATION RESULTS WITH ANNUAL DATA : KALMAN FILTER (1963-2003)

ITALY

LUX

NETHS

AUSTRIA

PORTUGAL

FINLAND

SWEDEN

UK

PHILLIPS CURVE

CYCLICAL COMPONENT (-1)

-14*

-0.45*

-.46**

-.62*

-.16

-.29**

UNEMPLOYMENT RATE (1. DIFF.)

-.31**

-.41**

-.25*

-.30**

-.27**

-.53**

R**2

0.27

.57

.27

.29

.12

.18

.12

.25

IS CURVE

CYCLICAL COMPONENT (-1)

1.34**

.93**

.97**

.81**

1.41**

1.53*

1.42**

1.22**

CYCLICAL COMPONENT (-2)

-.63**

-.20**

-.42**

-.47**

-.80**

-.76*

-.64**

-.71*

T-STATISTIC (UNIT ROOT)

-3.68

-3.43

-2.07

-3.97

-3.58

-4.71

-4.82

-4.72

-2LOGLIKE

141.96

84.52

145.99

146.07

137.09

133.09

139.13

127.51

*   Denotes significance at the 10% level.
** Denotes significance at the 5% level

13

GRAPH 2 : BREAKDOWN OF EURO ZONE ACTUAL UNEMPLOYMENT RATE INTO ITS
TREND (=NAIRU) AND CYCLICAL COMPONENTS

12 %

10 %

8 %

6 %

4 %

2 %

0 %

Observed 
Unemployment 
Rate

NAIRU (Long-
term 
component)

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

3.0 %

2.0 %

1.0 %

0.0 %

-1.0 %

-2.0 %

-3.0 %

Cyclical (short-
term) 
component

Upper 
Confidence 
Bound

Lower 
Confidence 
Bound

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

TABLE 2 : BREAKDOWN OF EURO ZONE ACTUAL UNEMPLOYMENT RATE INTO ITS
TREND (=NAIRU) AND CYCLICAL COMPONENTS

Trend Component
(i.e. NAIRU)

Cyclical
Component
Observed
Unemployment
Rate

1963 1968 1973 1978 1983 1988 1993 1998 2003

1.9

0.0

2.6

3.6

5.5

7.9

9.4

10.1

9.9

8.6

0.3

-0.9

-0.3

0.8

0.0

0.5

0.8

-0.5

1.9

2.9

2.7

5.2

8.7

9.4

10.6

10.7

8.1

NB: These results are estimated by the Kalman filter algorithm when applying the theoretical model to
aggregated  Euro  zone  data.  The  Euro  zone  NAIRU  used  for  the  calculation  of  output  gaps  (see
section 2) results from the aggregation of the estimated NAIRU’s for the individual member states.

14

SECTION 2  : POTENTIAL OUTPUT AND OUTPUT GAP ESTIMATES - EU15, EURO
ZONE AND US

2.1  ESTIMATES FOR EU15, EURO ZONE AND US (1981-2003)

ESTIMATES  OF  POTENTIAL  OUTPUT  AND  OUTPUT  GAPS : This sub-section  presents
estimates (in graphical and tabular form) on the growth rate of potential output in the
EU15,  Euro  Zone  and  the  US  based  on  the  variant  of  the  production  function
approach  presented  in  Section  1.    In  addition  to  the  potential  growth  estimates,  the
tables and graphs presented also include actual growth rates and the associated output
gaps2,  as  well  as  the  decomposition  of  potential  growth  into  its  respective  labour,
capital and TFP components, for each year of the period 1981-2003.  In addition, in
order to provide an insight into the key driving forces behind the figures, the series for
the  important  determining  variables  which  lie  behind  these  estimates  are  also
provided, namely trend total factor productivity, Kalman Filter derived NAIRU's, the
population  of  working  age,  participation  rate  changes  and  finally  the  investment  to
GDP ratio.  All the estimates have been calculated on the basis of clear assumptions
regarding  the  latter  exogenous  variables  and  using  the  following  data  sources  and
inputs : for the  historical  period  the  series  have  been  taken  from  ECFIN’s  AMECO
databank,  with  the  Commission  services  final  Spring  2002  forecasts  for  the  years
2002-2003  being  used.    These  latter  forecasts  have  been  produced  by  ECFIN’s
country  desk  officers.    Finally,  annex  1  contains  a  series  of  equivalent  tables  and
graphs for all of the individual Member States of the EU.

COMPARISON  OF  EU15,  EURO  ZONE  AND  US  :  GROWTH  COMPONENTS  :  When
comparing  the  growth  contributions  of  labour,  capital  and  TFP  in  the  EU15  /  Euro
Zone over the last two decades compared with the experience of the US over the same
period,  there  are  striking  differences.    As  shown  in  the  accompanying  graphs  and
tables,  the  US  boom  in  the  1990's  is  clearly  driven  by  capital  formation  and  an
acceleration of TFP, with the annual average growth rate increasing from 2 ¾% over
the period 1991-1995 to 3 ½% for the period 1996-2000. The figures for Europe are
clearly  less  impressive  in  terms  of  the  overall  growth  rate  acceleration  and  the
compositional changes are also different to that of the US.  While growth accelerated
in  both  the  EU15  and  the  Euro  Zone  in  recent  years,  when  one  looks  at  period
averages one sees that for 1996-2000 the potential growth rate averaged 2.2-2.3% in
both areas which is virtually identical to the outturn achieved for 1991-1995.  In terms
of  the  composition  of  potential  growth,  both  the  EU15  and  the  Euro  Zone  both
witnessed an improvement of about a ¼ of a % point in the contribution of labour to
growth  over  the  1996-2000  period,  with  this  gain  being  largely  offset  by  small
declines in the remaining components of growth (see Annex 2).

2  It  should  be  noted  that  the  ECFIN  production  function  approach  is  estimated  to  ensure  that  the  output  gaps  produced  are
symmetric i.e. the mean of the output gap over the sample period is zero.  In addition, the data for EU15 and the Euro Zone
shown  in  this  paper  differ  slightly  from  those  of  ECFIN’s  AMECO  database  since  for  illustrative  purposes  the  production
function methodology is applied directly to the aggregated AMECO series.

15

                                                
TABLE 3 : EUROPEAN UNION (EU15)  OUTPUT GAP AND DETERMINANTS

O u tp u t G ap s (%  of 
P oten tia l O u tp u t)

P oten tial G row th  
(annual %  ch an ge)

C on trib u tion s to Poten tial 
G row th *

D eterm in an ts of L ab ou r Poten tial an d  
C ap ital A ccu m u lation

H P  F ilter

P F  m eth od

H P  T ren d  
G row th

P F  P oten tial 
G ro w th

L ab o u r 
C on trib u tio n

C ap ital 
A ccu m u lation  
C on trib u tion

T F P  
C on trib u tion

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P eriods

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .7
-1 .9
-2 .1
-1 .9
-1 .7
-1 .3
-1 .0
0 .7
1 .9
2 .7
2 .3
1 .3
-1 .3
-0 .7
-0 .5
-1 .1
-0 .8
-0 .2
0 .1
1 .1
0 .3
-0 .5
0 .0

-0 .5
0 .0
0 .2
-0 .2
0 .0

-0 .6
-1 .6
-2 .0
-1 .7
-1 .2
-0 .7
-0 .1
1 .6
2 .5
2 .6
1 .9
0 .7
-1 .5
-0 .8
-0 .5
-0 .9
-0 .5
0 .1
0 .2
0 .9
0 .0
-0 .8
-0 .5

-0 .1
0 .0
0 .0
0 .0
-0 .4

2 .0
2 .0
2 .1
2 .1
2 .2
2 .3
2 .4
2 .4
2 .4
2 .4
2 .3
2 .2
2 .2
2 .2
2 .2
2 .2
2 .2
2 .3
2 .3
2 .3
2 .3
2 .3
2 .3

2 .2
2 .2
2 .2
2 .3
2 .3

2 .0
2 .0
2 .2
2 .1
2 .1
2 .2
2 .3
2 .5
2 .7
2 .8
2 .5
2 .3
1 .9
2 .1
2 .2
2 .1
2 .2
2 .4
2 .5
2 .6
2 .6
2 .5
2 .6

2 .3
2 .3
2 .2
2 .3
2 .5

0 .1
0 .1
0 .4
0 .3
0 .2
0 .3
0 .3
0 .4
0 .5
0 .6
0 .4
0 .3
0 .1
0 .3
0 .4
0 .4
0 .5
0 .6
0 .7
0 .8
0 .8
0 .7
0 .7

0 .3
0 .4
0 .3
0 .6
0 .8

0 .9
0 .7
0 .7
0 .7
0 .7
0 .7
0 .8
0 .9
1 .0
1 .0
0 .9
0 .8
0 .6
0 .6
0 .7
0 .7
0 .7
0 .7
0 .8
0 .8
0 .7
0 .7
0 .7

Period  A verages

0 .8
0 .7
0 .7
0 .7
0 .7

1 .0
1 .1
1 .1
1 .1
1 .2
1 .2
1 .2
1 .3
1 .2
1 .2
1 .2
1 .1
1 .1
1 .1
1 .1
1 .0
1 .0
1 .0
1 .0
1 .0
1 .0
1 .0
1 .1

1 .2
1 .1
1 .1
1 .0
1 .0

G row th  of 
W orking A g e 
P opu lation 
(annu al %  
change)
1 .1
1 .1
1 .0
0 .9
0 .5
0 .4
0 .4
0 .4
0 .5
0 .6
0 .5
0 .4
0 .4
0 .3
0 .3
0 .3
0 .2
0 .2
0 .2
0 .3
0 .4
0 .3
0 .2

T ren d 
P articipation 
R ate (%  of 
W orking A ge 
P opulation)
6 6 .6
6 6 .6
6 6 .6
6 6 .6
6 6 .6
6 6 .7
6 6 .8
6 6 .9
6 7 .0
6 7 .1
6 7 .2
6 7 .3
6 7 .4
6 7 .6
6 7 .7
6 7 .9
6 8 .2
6 8 .4
6 8 .7
6 9 .0
6 9 .3
6 9 .6
6 9 .9

0 .7
0 .3
0 .4
0 .3
0 .3

6 6 .7
6 7 .9
6 7 .4
6 8 .4
6 9 .6

N A IR U        
(%  of L abour 
F orce)

Investm ent 
R atio (%  of 
P otential 
O utput)

7 .7
8 .4
8 .8
9 .2
9 .5
9 .6
9 .7
9 .7
9 .6
9 .5
9 .5
9 .5
9 .9
1 0 .0
9 .8
9 .8
9 .7
9 .4
9 .0
8 .6
8 .3
8 .0
7 .5

9 .2
9 .5
9 .8
9 .3
7 .9

1 9 .9
1 9 .3
1 8 .9
1 8 .8
1 8 .9
1 9 .3
1 9 .9
2 1 .1
2 2 .0
2 2 .2
2 1 .5
2 1 .0
1 9 .4
1 9 .5
1 9 .7
1 9 .7
2 0 .0
2 0 .8
2 1 .3
2 1 .7
2 1 .2
2 0 .8
2 1 .1

2 0 .0
2 0 .5
2 0 .2
2 0 .7
2 1 .0

* : Lab our and C ap ital con tribu tions are lab our and capital g row th rates a djusted for their respective factor sh ares. Labour, C apital and TF P  co ntrib utions sum  up  to P oten tial 
G row th : an y app arent discrep ancies are due to rounding.

16

    
GRAPH 3 : EUROPEAN UNION (EU15)  OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

Output gap

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

71%

70%

69%

68%

67%

66%

65%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

17

TABLE 4 : EURO ZONE (EU12)  OUTPUT GAP AND DETERMINANTS

O u tp u t G ap s (%  of 
P oten tia l O u tp u t)

P oten tial G row th  
(annual %  ch an ge)

C on trib u tion s to Poten tial 
G row th *

D eterm in an ts of L ab ou r Poten tial an d  
C ap ital A ccu m u lation

H P  F ilter

P F  m eth od

H P  T ren d  
G row th

P F  P oten tial 
G ro w th

L ab o u r 
C on trib u tio n

C ap ital 
A ccu m u lation  
C on trib u tion

T F P  
C on trib u tion

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P eriods

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .1
-1 .5
-2 .0
-1 .9
-1 .9
-1 .8
-1 .7
0 .0
1 .5
2 .8
2 .9
2 .2
-0 .8
-0 .6
-0 .5
-1 .2
-1 .0
-0 .4
0 .0
1 .1
0 .3
-0 .6
0 .0

-0 .7
0 .2
0 .6
-0 .3
-0 .1

0 .1
-1 .2
-1 .9
-1 .7
-1 .4
-1 .1
-0 .7
1 .0
2 .2
2 .8
2 .7
1 .6
-1 .1
-0 .9
-0 .6
-1 .1
-0 .8
-0 .2
0 .1
1 .0
0 .1
-0 .8
-0 .5

-0 .2
0 .1
0 .3
-0 .2
-0 .4

2 .1
2 .1
2 .1
2 .1
2 .2
2 .3
2 .4
2 .5
2 .5
2 .4
2 .3
2 .3
2 .2
2 .1
2 .1
2 .1
2 .2
2 .2
2 .2
2 .3
2 .3
2 .3
2 .3

2 .3
2 .2
2 .2
2 .2
2 .3

2 .2
2 .0
2 .2
2 .0
2 .0
2 .1
2 .2
2 .5
2 .7
2 .9
2 .6
2 .5
1 .9
2 .0
2 .1
2 .0
2 .1
2 .3
2 .4
2 .5
2 .5
2 .4
2 .5

2 .3
2 .2
2 .2
2 .2
2 .5

0 .2
0 .2
0 .4
0 .2
0 .2
0 .2
0 .2
0 .3
0 .5
0 .6
0 .5
0 .4
0 .2
0 .3
0 .4
0 .4
0 .5
0 .6
0 .7
0 .8
0 .9
0 .7
0 .8

0 .3
0 .5
0 .4
0 .6
0 .8

1 .0
0 .8
0 .8
0 .7
0 .7
0 .7
0 .8
0 .9
1 .0
1 .0
1 .0
0 .9
0 .7
0 .7
0 .7
0 .7
0 .7
0 .7
0 .8
0 .8
0 .7
0 .7
0 .7

Period  A verages

0 .8
0 .8
0 .8
0 .7
0 .7

1 .0
1 .0
1 .0
1 .1
1 .1
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .1
1 .1
1 .0
1 .0
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
1 .0

1 .1
1 .0
1 .1
0 .9
0 .9

G row th  of 
W orking A g e 
P opu lation 
(annu al %  
change)
1 .3
1 .2
1 .1
0 .9
0 .6
0 .4
0 .4
0 .5
0 .5
0 .7
0 .6
0 .5
0 .5
0 .3
0 .2
0 .2
0 .2
0 .2
0 .1
0 .3
0 .4
0 .2
0 .2

T ren d 
P articipation 
R ate (%  of 
W orking A ge 
P opulation)
6 4 .7
6 4 .7
6 4 .6
6 4 .6
6 4 .6
6 4 .6
6 4 .7
6 4 .8
6 4 .9
6 5 .0
6 5 .1
6 5 .3
6 5 .5
6 5 .7
6 5 .9
6 6 .2
6 6 .5
6 6 .8
6 7 .1
6 7 .5
6 7 .9
6 8 .2
6 8 .6

0 .8
0 .3
0 .4
0 .2
0 .3

6 4 .7
6 6 .2
6 5 .5
6 6 .8
6 8 .2

N A IR U        
(%  of L abour 
F orce)

Investm ent 
R atio (%  of 
P otential 
O utput)

7 .7
8 .5
8 .8
9 .3
9 .7
9 .8
1 0 .0
1 0 .0
9 .9
9 .8
9 .8
9 .8
1 0 .3
1 0 .4
1 0 .3
1 0 .3
1 0 .3
1 0 .1
9 .7
9 .3
9 .0
8 .7
8 .2

9 .4
1 0 .0
1 0 .1
9 .9
8 .6

2 1 .3
2 0 .3
1 9 .8
1 9 .3
1 9 .4
1 9 .8
2 0 .3
2 1 .4
2 2 .3
2 2 .8
2 2 .5
2 2 .0
2 0 .2
2 0 .2
2 0 .4
2 0 .3
2 0 .5
2 1 .1
2 1 .8
2 2 .3
2 1 .7
2 1 .3
2 1 .6

2 0 .7
2 1 .1
2 1 .1
2 1 .2
2 1 .5

* : Lab our and C ap ital con tribu tions are lab our and capital g row th rates a djusted for their respective factor sh ares. Labour, C apital and TF P  co ntrib utions sum  up  to P oten tial 
G row th : an y app arent discrep ancies are due to rounding.

18

GRAPH 4 : EURO ZONE (EU12)  OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

-2%

Output gap

4%

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

3%

2%

1%

0%

-1%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

69%

68%

67%

66%

65%

64%

63%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

19

TABLE 5 : UNITED STATES (US) OUTPUT GAP AND DETERMINANTS

O u tp u t 
G ap  (%  o f 
P otential 
O utput)

Potential 
G row th  
(annu al %  
chang e)

C on trib ution s to Poten tial 
G row th *

La bou r 
C on tribu tion

C ap ital 
A ccum ulation 
C on tributio n

T F P  
C ontributio n

1 981
1 982
1 983
1 984
1 985
1 986
1 987
1 988
1 989
1 990
1 991
1 992
1 993
1 994
1 995
1 996
1 997
1 998
1 999
2 000
2 001
2 002
2 003

P eriods
1 981-199 0
1 991-200 0
1 991-199 5
1 996-200 0
2 001-200 3

-1 .9
-6 .3
-4 .8
-1 .1
-0 .5
-0 .4
-0 .1
1.1
1.8
0.9
-2 .1
-1 .8
-1 .9
-0 .7
-1 .1
-0 .7
0.3
1.0
1.4
2.0
0.1
-0 .1
0.0

-1 .1
-0 .4
-1 .5
0.8
0.0

3.0
2.6
2.7
3.2
3.2
3.3
3.0
2.9
2.7
2.7
2.6
2.7
2.8
2.9
3.0
3.2
3.5
3.6
3.7
3.6
3.1
2.9
3.0

2.9
3.1
2.8
3.5
3.0

1.4
1.1
1.1
1.3
1.1
1.2
1.0
0.9
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.7
0.9
0.8
0.8
0.7
0.5
0.5
0.5

1.1
0.8
0.8
0.8
0.5

0 .9
0 .7
0 .7
1 .0
1 .0
1 .0
0 .9
0 .9
0 .9
0 .8
0 .6
0 .6
0 .7
0 .8
0 .9
1 .0
1 .1
1 .2
1 .3
1 .3
1 .1
1 .0
1 .1

0 .9
1 .0
0 .7
1 .2
1 .1

0.7
0.8
0.9
1.0
1.0
1.1
1.1
1.1
1.1
1.1
1.1
1.2
1.2
1.3
1.4
1.4
1.5
1.5
1.5
1.5
1.5
1.5
1.4
Period  A verages
1.0
1.4
1.2
1.5
1.5

N A IR U        
(%  of L abour 
F orce)

Investment 
R atio (%  of 
P otential 
O utput)

D eterm in an ts of L ab ou r Poten tial an d  C ap ital 
A ccum u lation
T rend 
P articipation 
R ate (%  of 
W orking A g e 
P opulation)
71 .2
71 .7
72 .2
72 .8
73 .3
73 .8
74 .3
74 .8
75 .3
75 .7
76 .1
76 .4
76 .7
76 .9
77 .0
77 .1
77 .2
77 .3
77 .3
77 .3
77 .2
77 .1
77 .1

G row th of 
W orking A g e 
P opulation 
(annual %  
change)
1.2
1.0
0.9
1.0
1.0
1.0
0.8
0.7
0.6
0.7
0.7
0.9
0.9
0.9
1.0
1.1
1.2
1.2
1.1
1.1
0.7
0.9
1.0

16.4
14.8
15.3
17.2
17.6
17.3
16.7
16.8
16.9
16.4
15.1
15.6
16.2
17.0
17.5
18.4
19.4
20.7
21.6
22.3
21.4
20.8
21.3

5.8
5.8
5.8
5.6
5.6
5.5
5.4
5.3
5.4
5.4
5.3
5.3
5.3
5.3
5.4
5.4
5.4
5.4
5.3
5.2
5.2
5.3
5.5

0.9
1.0
0.9
1.1
0.9

73 .5
76 .9
76 .6
77 .2
77 .1

5.6
5.3
5.3
5.3
5.3

16.5
18.4
16.3
20.5
21.2

*  : La bou r and  C ap ital con tributions a re lab ou r a nd  ca pita l grow th  rates adju sted for th eir resp ective fa cto r sh ares. L abo ur, C ap ital and  TF P  
con tributions sum  u p to  P otentia l G ro w th : a ny ap parent d iscrep ancies are d ue to ro und ing.

20

GRAPH 5 : UNITED STATES (US) OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

8%

6%

4%

2%

0%

-2%

-4%

Output gap

4%

2%

0%

-2%

-4%

-6%

-8%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

4%

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

78%
77%
76%
75%
74%
73%
72%
71%
70%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

21

2.2  MEDIUM-TERM EXTENSION (2004-2006) – EU15 AND EURO ZONE

While  the  production  function  derived  potential  output  estimates  for  the  EU15,  the
Euro Zone and the US presented in 2.1 provide a good picture of the present output
capacity of both economies, they should not however be seen as forecasts of medium-
term sustainable rates of growth but more as an indication of likely developments if
past trends were to persist in the future.  If, for example, a country's potential growth
is  3%  in  2003,  it  can  only  be  sustained  at  that  rate  in  future  years  if  none  of  the
underlying driving forces change.  Any longer term assessment would need therefore
to be based on a careful evaluation of the likelihood that present rates of growth for
labour potential, productive capacity and TFP will persist over the time horizon to be
analysed.    By  way  of  illustration  as  to  the  kind  of  numbers  which  emerge  if  one
wished to carry out a simple technical extrapolation for the three years following the
end  of  the  forecast  period,  it  was  decided  to  produce  such  an  exercise  for  the  years
2004-2006. It is important to stress that this technical extension is in no way a forecast
for these years, it is simply an attempt to illustrate what would happen if the trends of
recent  years  were  to  continue  on,  using  established  and  transparent  ARIMA
procedures.

It is in this context that the illustrative estimates for the years 2004-2006 for the EU15
and the Euro Zone which are shown at the end of this section should be assessed, with
the  potential  growth  rates  for  those  years  being  calculated  using  the  following  key
inputs :

•  1.TREND  TOTAL  FACTOR  PRODUCTIVITY  (TFP):  Trend  TFP  is  modelled  as
the  HP  filtered  Solow  Residual.  TFP  can  be  calculated  until  the  end  of  the
short term forecast horizon, using the forecasts for GDP, employment and the
capital stock. From 2004 until 2008 a TFP forecast is generated with a simple
autoregressive model, where the log of current TFP is explained by a constant,
a time trend and lagged values of TFP. Lags up to three years are allowed such
as  to  render  the  residual  white  noise.  This  is  the  simplest  time  series
representation  and  is  likely  to  provide  smooth  projections.  The  HP  trend  is
then  calculated  on  the  whole  series  up  to  2008.  Obviously,  there  is  an  end
point  bias  problem  in  2008.  However,  given  that  we  are  working  under  the
technical assumption that output gaps will be closed in 2006 this bias does not
seem to be severe.

•  2.KALMAN FILTER NAIRU’S: The trend specification chosen for the NAIRU
implies that the best prediction for the change in the NAIRU in future periods
is the current estimate of the intercept. This basically implies that the slope of
the  NAIRU  in  2003  should  be  used  for  the  projection  until  2006.  Such  a
specification  seems  problematic  for  longer-term  projections  since  it  will
eventually  violate  economic  constraints  (such  as  non-negativity  of  the
NAIRU,  for  example).  An  alternative  specification  which  is  more  consistent
with  the  common  notion  of  the  NAIRU  as  a  stable  long  run  level  of  the
unemployment rate would be a random walk without drift. This specification
would  imply  a  flat  extrapolation  of  the  last  NAIRU  value.  Though  this
specification  does  not  work  well  in  estimation  for  European  data  where
persistent trend changes of the unemployment rate can be observed, it may be

22

a more plausible specification for projections. The projections produced at the
end  of  this  section  constitute  a  compromise  between  the  two  concepts.  The
NAIRU is projected according to the following rule:

NAIRU

+
1

t

=

NAIRU

t

+

(*5.

NAIRU

−

t

NAIRU

)

−
1

t

In  forecasting  the  NAIRU  we  allow  50%  of  the  most  recent  decline.  This
implies that the NAIRU is practically stable in 2006, because after 3 years the
change in the NAIRU only amounts to 12.5% of the decline in 2003.

•  3.POPULATION OF WORKING AGE: In terms of a projection for the population
of  working  age  for  the  three  years  2004-2006,  since  Eurostat  periodically
produce long range population projections for all of the EU’s Member States,
it was decided that the most recent Eurostat projections should be used for the
extension to 2006.

•  4.PARTICIPATION  RATE  CHANGES  –  While  it  would  be  more  appropriate  to
split  the  overall  participation  rate  into  its  male  and  female  components,
investigations into the feasibility of doing so suggested, at this stage at least,
that  without  an  improvement  in  data  availability  that  this  breakdown  would
not provide a significant degree of additional information over and above that
provided by the total participation rate.  The most significant problem was in
terms  of  the  timeliness  of  the  data  and  the  short  sample  length  for  the
necessary series.  While unharmonised data is available for most of the EU’s
Member States for the period 1983-2001, there are some significant gaps for a
number of countries which result in EU15 data being available only over the
period 1992-1997.  In addition it should be stressed that this is unharmonised
data,  with  a  recent  attempt  by  Eurostat  to  harmonise  this  data  producing  a
broadly comparable series of figures, but only from 1990 and again with data
for  all  the  Member  States  only  being  available  up  until  1997.    Due  to  these
data constraints it was felt, at this point in time, to continue to work with the
total  participation  rate  series.    On  the  basis  of  the  forecasts  by  ECFIN  desk
officers  for  the  labour  force  and  the  population  of  working  age  for  the
individual  countries,  the  implied,  detrended,  total  participation  rate  up  to  the
end  of  the  forecasting  period  (i.e.  2003)  is  produced  and  this  latter  series  is
extended  to  2006  on  the  basis  of  simple  autoregressive  projections  with  an
estimated time trend.

•  5.INVESTMENT  TO  (POTENTIAL)  GDP  RATIO  –  Since  the  purpose  of  the
exercise  is  to  get  an  estimate  for  potential  output  in  2006,  the  investment  to
potential  GDP  series  is  used  as  an  exogenous  variable.  An  AR  process
allowing for a constant and a time trend is specified and estimated until 2003.
Notice, this makes investment endogenous. For a constant investment to GDP
ratio, investment responds to potential output with an elasticity equal to one.

23

TECHNICAL SPECIFICATION OF THE MODEL USED

The model used can be summarised as follows:

EXOGENOUS VARIABLES

•  POPW - (Population of Working Age)
•  PARTS - (Smoothed Participation Rate)
•  NAIRU - (Structural Unemployment)
• 
•  SRHP - (HP Filtered Solow Residual)

IYPOT - (Investment to Potential GDP Ratio)

ENDOGENOUS VARIABLES

•  LP - (Potential Employment)
• 
I - (Investment)
•  K - (Capital Stock)
•  YPOT -(Potential Output)

1. POTENTIAL EMPLOYMENT

LP

=

POPW

*

PARTS

1(*

−

NAIRU

)

2. INVESTMENT AND CAPITAL

=

I

IYPOT

*

YPOT

−+=

IK

1(

dep

)

K

−
)1(

3

3. POTENTIAL OUTPUT

YPOT

=

LP

65.

K

35.

SRHP

4. OUTPUT GAP

YGAP

=

Y
(

/

YPOT

−

)1

3 The depreciation rate was assumed to remain constant over the projection period.

24

                                                
TABLE 6 : EUROPEAN UNION (EU15)  OUTPUT GAP AND DETERMINANTS
MEDIUM TERM EXTENSION

Output 
Gaps (% of 
Potential 
Output)

Potential 
Growth 
(annual % 
change)

Contributions to Potential Growth

Labour 
Contribution

Capital 
Accumulation 
Contribution

TFP 
Contribution

2000
2001
2002
2003
2004
2005
2006

0.9
0.0
-0.8
-0.5
-0.4
-0.2
0.0

2.6
2.6
2.5
2.6
2.3
2.3
2.3

0.8
0.8
0.7
0.7
0.5
0.4
0.4

0.8
0.7
0.7
0.7
0.7
0.7
0.7

1.0
1.0
1.0
1.1
1.1
1.1
1.1

NAIRU       
(% of Labour 
Force)

Determinants of Labour Potential and Capital 
Accumulation
Trend 
Participation 
Rate (% of 
Working Age 
Population)
69.0
69.3
69.6
69.9
70.2
70.5
70.8

Growth of 
Working Age 
Population 
(annual % 
change)
0.3
0.4
0.3
0.2
0.1
0.1
0.1

Investment 
Ratio (% of 
Potential 
Output)

21.7
21.2
20.8
21.1
20.9
20.8
20.9

8.6
8.3
8.0
7.5
7.3
7.2
7.1

TABLE 7 : EURO ZONE (EU12)  OUTPUT GAP AND DETERMINANTS
MEDIUM TERM EXTENSION

Output 
Gaps (% of 
Potential 
Output)

Potential 
Growth 
(annual % 
change)

Contributions to Potential Growth

Labour 
Contribution

Capital 
Accumulation 
Contribution

TFP 
Contribution

2000
2001
2002
2003
2004
2005
2006

1.0
0.1
-0.8
-0.5
-0.3
-0.2
0.0

2.5
2.5
2.4
2.5
2.2
2.2
2.2

0.8
0.9
0.7
0.8
0.5
0.4
0.4

0.8
0.7
0.7
0.7
0.7
0.7
0.7

0.9
0.9
0.9
1.0
1.0
1.0
1.0

NAIRU       
(% of Labour 
Force)

Determinants of Labour Potential and Capital 
Accumulation
Trend 
Participation 
Rate (% of 
Working Age 
Population)
67.5
67.9
68.2
68.6
69.0
69.4
69.8

Growth of 
Working Age 
Population 
(annual % 
change)
0.3
0.4
0.2
0.2
0.0
0.0
0.0

Investment 
Ratio (% of 
Potential 
Output)

22.3
21.7
21.3
21.6
21.3
21.2
21.4

9.3
9.0
8.7
8.2
8.0
7.9
7.8

25

 CONCLUDING REMARKS

KEY GUIDING PRINCIPLES FOR FUTURE WORK ON THE PRDOUCTION FUNCTION
METHODOLOGY

With regard to the specific issue of the present PF methodology, it is clear that since
the PF method is envisaged to become the sole method to be used by the Commission
services  for  calculating  structural  budget  balances  that  the  pressure  for  changing
particular  aspects of the  approach will become intense over  a  short  to  medium  term
time horizon.  It is important in this respect that any changes to the methodology are
assessed on the basis of some basic operating principles, with the following the most
important ones to be retained :

•  SIMPLICITY : while many academically more complex suggestions could be put
forward  for  changing  the  present  PF  methodology,  the  simplicity  of  the  present
approach,  where the key inputs and outputs are clearly  delineated,  is  something
which should be retained in the future given the possible use of these figures in an
operationally sensitive area such as structural budget balance calculations.

•  TRANSPARENCY  /  EQUAL  TREATMENT  FOR  ALL  MEMBER  STATES  :  This
principle is  closely  linked  with  the  first  principle  of  simplicity,  since  individual
Member  States  must  be  happy  that  any  methodology  which  would  be  used  for
policy surveillance purposes is fully transparent and replicable as well as being as
judgement  free  and  automated  as  possible.    In  addition  it  is  accepted  that  any
changes  to  the  methodology  described  in  sections  1  and  2  should  only  occur
following  an  open  and  fair  consultation  process  with  all  of  the  Member  States.
Furthermore, adjustments for individual country specificities should be kept to an
absolute minimum in any future revisions, with equal treatment for all countries
being a principle which should be assiduously respected.

•  PRUDENCE : One of the guiding principles which has been adhered to in drawing
up the particular variant of the PF method presented in this paper is the need to
take a “prudent” view regarding changes to the methodology in terms of assessing
the  past  and  future  evolution  of  potential  growth  in  the  EU.    In  this  regard  the
cyclicality  of  the  estimates  produced  is  a  very  serious  issue,  with  the  ideal  PF
method  being  one  which  produced  a  potential  growth  series  which  was  less
cyclical  than  the  commonly  used  HP  filter  method,  with  output  gaps  growing
quickly  in  the  downswing  and  closing  rapidly  in  the  upswing.    In  this  regard
while it is accepted that at present the differences in terms of cyclicality between
the PF and HP filter methods may be small, nevertheless reducing the cyclicality
of the PF estimates to an absolute minimum should be actively striven for in any
future changes to the method.  This cyclicality issue is particularly important in
avoiding the generation of an excessively optimistic picture for potential growth,
and  by  implication  structural  budget  balance  positions,  in  the  upswing  stage  of
the cycle.  Consequently any changes to the present estimation methodology must
be biased towards taking a prudent view.  In fact the medium term extension for
the  period  2004-2006,  described  in  section  2.2,  is  an  example  of  the  prudence
principle and especially the rules imposed regarding changes to the NAIRU and
the population of working age, where a cautious position has been retained.

26

FUTURE RESEARCH AGENDA

While  a  lot  of  work  has  already  been  done  in  this  area,  it  is  clear  that  this  is  an
ongoing research topic, with future research likely to be concentrated on the following
themes :
•  ongoing experimentation with  new  methodologies,  most  notably  Kalman  Filters,
where  consideration  will  be  given  to  their  use  in  areas  other  than  in  NAIRU
estimation;

•  examining  the  possibility  of  a  further  decomposition  of  the  labour  potential
component  of  potential  growth  in  terms  of  hours  worked  (see  annex  3)  and  in
terms of male and female participation rates.
looking  again  at  the  issue  of  the  cyclicality  of  the  overall  methodology  and
experimenting,  in  this  context,  with  the  use  of  capacity  utilisation  indicators  or
model simulations to estimate the size of any pro-cyclical estimation  bias  which
may exist;

• 

•  and finally, a range of other issues will need to be looked at including, use of the
capital  services  versus  the  perpetual  inventory  method  in  evaluating  the  capital
component of potential growth; possible use of the vintage method for calculating
total  factor  productivity;  business  sector  potential  growth  versus  total  economy
estimates;  and  finally,  extending  and  deepening  the  analysis  of  "new"  economy
influences on potential growth developments.

27

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32

LIST OF ANNEXES

ANNEX 1 :

DETAILED TABLES AND GRAPHS FOR THE 15 EU MEMBER STATES

(Country  order  :  BELGIUM,  DENMARK,  GERMANY,  GREECE,  SPAIN,  FRANCE,
IRELAND,  ITALY,  LUXEMBOURG,  THE  NETHERLANDS,  AUSTRIA,  PORTUGAL,
FINLAND, SWEDEN, UNITED KINGDOM)

ANNEX 2 :

COMPARATIVE TABLES AND GRAPHS (EU15, EURO ZONE AND  US)

ANNEX 3 :

HOURS  WORKED  :  ADJUSTMENT  OF  POTENTIAL  GROWTH  AND  ITS
COMPONENTS FOR HOURS WORKED PER PERSON EMPLOYED (EU15,
EURO ZONE AND US)

ANNEX 4 :

CALCULATING MULTIPLIERS FOR INDIVIDUAL MEMBER STATES

Note : All figures presented in these annexes are based on data available in mid-April
2002 in the AMECO databank and using the Commission services final Spring 2002
forecasts.

33

34

ANNEX 1 : DETAILED TABLES AND GRAPHS
FOR THE 15 EU MEMBER STATES

35

 
 TABLE A1.1 : BELGIUM OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o ten tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

0 .5
-1 .0
-2 .5
-2 .0
-2 .0
-2 .4
-1 .8
0 .5
2 .0
2 .7
2 .3
1 .8
-1 .8
-1 .2
-0 .7
-1 .7
-0 .4
-0 .5
0 .2
1 .9
0 .6
-0 .5
0 .0

-0 .6
0 .0
0 .1
-0 .1
0 .1

-0 .4
-1 .6
-3 .4
-2 .6
-2 .5
-2 .3
-1 .2
1 .2
2 .6
3 .1
2 .4
1 .7
-1 .8
-1 .2
-0 .9
-1 .8
-0 .5
-0 .4
0 .2
1 .8
0 .4
-0 .6
-0 .1

-0 .7
0 .0
0 .1
-0 .1
-0 .1

1 .9
1 .9
1 .9
1 .9
2 .0
2 .1
2 .2
2 .3
2 .3
2 .2
2 .2
2 .1
2 .1
2 .1
2 .1
2 .2
2 .2
2 .3
2 .3
2 .3
2 .3
2 .3
2 .3

2 .1
2 .2
2 .1
2 .3
2 .3

1 .7
1 .6
2 .2
1 .7
1 .8
1 .6
1 .6
2 .1
2 .5
2 .4
2 .4
2 .3
2 .1
2 .0
2 .3
2 .1
2 .3
2 .2
2 .4
2 .5
2 .4
2 .1
2 .3

1 .9
2 .3
2 .2
2 .3
2 .3

-0 .4
-0 .3
0 .5
0 .0
0 .0
-0 .2
-0 .2
0 .1
0 .3
0 .2
0 .4
0 .4
0 .4
0 .3
0 .5
0 .4
0 .5
0 .3
0 .5
0 .7
0 .7
0 .5
0 .6

0 .0
0 .5
0 .4
0 .5
0 .6

0 .9
0 .7
0 .5
0 .5
0 .5
0 .5
0 .6
0 .8
1 .0
1 .1
0 .9
0 .9
0 .8
0 .7
0 .8
0 .7
0 .7
0 .8
0 .8
0 .6
0 .6
0 .5
0 .6

P erio d  A v era g es

0 .7
0 .8
0 .8
0 .7
0 .6

1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .1
1 .0
1 .0
1 .0
1 .0
1 .0
1 .0
1 .0
1 .1
1 .1
1 .1
1 .1
1 .1
1 .1

1 .2
1 .0
1 .0
1 .0
1 .1

G ro w th of 
W o rking  A g e 
P opulation 
(a nnua l %  
cha ng e)
0 .5
0 .5
0 .8
0 .6
0 .3
0 .1
0 .0
0 .2
0 .1
0 .0
0 .0
0 .1
0 .2
0 .1
0 .0
0 .0
0 .0
0 .0
0 .1
0 .1
0 .4
0 .3
0 .2

T rend 
P articipa tion 
R ate (%  o f 
W orking  A g e 
P opula tion)
6 0 .4
6 0 .2
6 0 .0
5 9 .8
5 9 .7
5 9 .6
5 9 .5
5 9 .6
5 9 .7
5 9 .8
6 0 .0
6 0 .2
6 0 .5
6 0 .8
6 1 .1
6 1 .5
6 1 .8
6 2 .1
6 2 .4
6 2 .6
6 2 .9
6 3 .1
6 3 .4

0 .3
0 .1
0 .1
0 .1
0 .3

5 9 .8
6 1 .3
6 0 .5
6 2 .1
6 3 .1

N A IR U        
(%  o f L a bou r 
F o rce)

Investm ent 
R atio  (%  of 
P o tentia l 
O utpu t)

8 .2
8 .8
8 .6
8 .9
8 .8
9 .0
9 .3
9 .3
9 .1
9 .0
8 .7
8 .6
8 .7
8 .8
8 .5
8 .4
8 .3
8 .3
8 .1
7 .5
7 .3
7 .3
7 .0

8 .9
8 .4
8 .7
8 .1
7 .2

1 7 .5
1 6 .1
1 4 .8
1 5 .0
1 5 .7
1 6 .0
1 6 .7
1 8 .9
2 0 .8
2 2 .1
2 0 .6
2 0 .5
1 9 .5
1 9 .1
1 9 .7
1 9 .5
2 0 .4
2 0 .8
2 1 .0
2 1 .0
2 0 .6
2 0 .3
2 0 .5

1 7 .4
2 0 .2
1 9 .9
2 0 .6
2 0 .5

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

36

GRAPH A1.1 : BELGIUM OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

-2%

Output gap

4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

4%

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

64%

63%

62%

61%

60%

59%

58%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

-0.2%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

37

TABLE A1.2 : DENMARK OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-3 .6
-2 .5
-2 .3
-0 .6
1 .3
3 .6
2 .0
1 .6
0 .2
-0 .4
-0 .9
-2 .0
-3 .9
-0 .6
-0 .1
0 .1
0 .8
0 .9
0 .9
1 .6
0 .2
-0 .3
0 .0

-0 .1
-0 .3
-1 .5
0 .8
0 .0

-2 .8
-1 .7
-1 .8
0 .0
1 .6
3 .3
1 .3
1 .0
-0 .1
-0 .7
-1 .1
-1 .9
-3 .1
-0 .1
0 .3
0 .4
0 .7
0 .8
0 .9
1 .5
0 .3
-0 .1
0 .1

0 .0
-0 .2
-1 .2
0 .9
0 .1

1 .5
1 .5
1 .6
1 .7
1 .7
1 .7
1 .6
1 .6
1 .6
1 .6
1 .6
1 .8
1 .9
2 .1
2 .2
2 .3
2 .3
2 .3
2 .3
2 .3
2 .3
2 .2
2 .2

1 .6
2 .1
1 .9
2 .3
2 .3

0 .4
1 .5
1 .9
1 .6
2 .0
2 .3
1 .9
1 .5
1 .3
1 .6
1 .5
1 .5
1 .3
2 .2
2 .4
2 .4
2 .7
2 .4
2 .2
2 .4
2 .2
2 .2
2 .3

1 .6
2 .1
1 .8
2 .4
2 .2

-0 .2
0 .8
1 .1
0 .7
0 .8
0 .9
0 .5
0 .3
0 .0
0 .1
0 .0
0 .0
-0 .3
0 .4
0 .4
0 .3
0 .5
0 .2
0 .3
0 .4
0 .3
0 .2
0 .3

0 .5
0 .2
0 .1
0 .4
0 .3

0 .1
0 .2
0 .3
0 .4
0 .6
0 .9
0 .7
0 .5
0 .5
0 .4
0 .3
0 .2
0 .1
0 .2
0 .4
0 .4
0 .6
0 .6
0 .5
0 .7
0 .6
0 .7
0 .8

P erio d  A v era g es

0 .5
0 .4
0 .3
0 .6
0 .7

0 .4
0 .5
0 .5
0 .5
0 .6
0 .6
0 .6
0 .7
0 .8
1 .0
1 .1
1 .3
1 .4
1 .5
1 .6
1 .6
1 .5
1 .5
1 .4
1 .3
1 .3
1 .2
1 .2

0 .6
1 .4
1 .4
1 .5
1 .2

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
0 .7
0 .6
0 .5
0 .4
0 .3
0 .4
0 .5
0 .3
0 .3
0 .4
0 .4
0 .3
0 .3
0 .3
0 .4
0 .4
0 .2
0 .1
0 .1
0 .1
0 .1
0 .1
0 .2

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
7 7 .9
7 8 .4
7 8 .8
7 9 .3
7 9 .7
8 0 .1
8 0 .4
8 0 .7
8 0 .7
8 0 .7
8 0 .6
8 0 .4
8 0 .1
7 9 .8
7 9 .5
7 9 .3
7 9 .2
7 9 .1
7 9 .1
7 9 .1
7 9 .1
7 9 .2
7 9 .2

0 .4
0 .3
0 .4
0 .2
0 .1

7 9 .7
7 9 .6
8 0 .1
7 9 .1
7 9 .2

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

7 .8
7 .8
7 .2
7 .1
6 .9
6 .5
6 .5
6 .7
7 .1
7 .2
7 .5
7 .6
8 .1
7 .4
6 .9
6 .6
5 .8
5 .5
5 .1
4 .7
4 .4
4 .3
4 .1

7 .1
6 .5
7 .5
5 .5
4 .3

1 4 .5
1 5 .3
1 5 .3
1 6 .7
1 8 .7
2 1 .2
2 0 .7
1 9 .7
1 9 .3
1 8 .6
1 7 .7
1 7 .1
1 6 .2
1 7 .1
1 8 .7
1 8 .9
2 0 .5
2 2 .0
2 1 .7
2 3 .5
2 3 .0
2 3 .5
2 4 .2

1 8 .0
1 9 .3
1 7 .4
2 1 .3
2 3 .6

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

38

GRAPH A1.2 : DENMARK OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%

Output gap

4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

83%

82%

81%

80%

79%

78%

77%

0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

39

TABLE A1.3 : GERMANY OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

0 .4
-2 .4
-2 .5
-1 .7
-1 .9
-1 .8
-2 .7
-1 .6
-0 .6
2 .4
4 .3
4 .1
0 .6
0 .8
0 .6
-0 .5
-0 .9
-0 .7
-0 .6
0 .6
-0 .5
-1 .4
-0 .5

-1 .3
0 .8
2 .1
-0 .4
-0 .8

1 .1
-1 .5
-1 .5
-0 .7
-0 .3
-0 .2
-0 .8
0 .3
0 .8
2 .7
4 .5
3 .5
0 .1
0 .4
0 .2
-0 .8
-0 .9
-0 .7
-0 .5
0 .6
-0 .7
-1 .5
-0 .7

0 .0
0 .7
1 .8
-0 .4
-1 .0

1 .8
1 .8
1 .9
2 .0
2 .2
2 .4
2 .5
2 .6
2 .7
2 .7
2 .6
2 .5
2 .3
2 .1
2 .0
1 .9
1 .8
1 .8
1 .7
1 .7
1 .7
1 .8
1 .8

2 .3
2 .0
2 .3
1 .8
1 .8

2 .0
1 .7
1 .7
2 .0
1 .7
2 .2
2 .2
2 .5
3 .1
3 .8
3 .2
3 .2
2 .3
2 .0
2 .0
1 .7
1 .5
1 .8
1 .7
1 .9
1 .9
1 .6
1 .9

2 .3
2 .1
2 .5
1 .7
1 .8

0 .3
0 .1
0 .1
0 .3
-0 .1
0 .3
0 .2
0 .4
0 .9
1 .4
0 .8
0 .8
0 .2
0 .1
0 .2
0 .1
0 .0
0 .3
0 .2
0 .3
0 .5
0 .2
0 .4

0 .4
0 .3
0 .4
0 .2
0 .4

0 .9
0 .7
0 .7
0 .7
0 .6
0 .7
0 .7
0 .7
0 .8
0 .9
0 .9
1 .0
0 .8
0 .8
0 .8
0 .7
0 .7
0 .7
0 .7
0 .7
0 .5
0 .5
0 .5

P erio d  A v era g es

0 .7
0 .8
0 .9
0 .7
0 .5

0 .8
0 .9
0 .9
1 .0
1 .1
1 .2
1 .3
1 .4
1 .5
1 .5
1 .5
1 .4
1 .2
1 .1
1 .0
0 .9
0 .9
0 .8
0 .8
0 .8
0 .9
0 .9
1 .0

1 .2
1 .0
1 .2
0 .8
0 .9

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .5
1 .3
1 .0
0 .6
0 .2
0 .1
0 .1
0 .3
0 .7
1 .6
0 .9
0 .6
0 .5
0 .1
0 .2
0 .2
0 .1
0 .0
-0 .1
0 .1
0 .4
0 .0
-0 .1

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
7 1 .7
7 1 .7
7 1 .7
7 1 .8
7 1 .8
7 2 .0
7 2 .1
7 2 .2
7 2 .3
7 2 .4
7 2 .4
7 2 .5
7 2 .5
7 2 .6
7 2 .7
7 2 .9
7 3 .0
7 3 .2
7 3 .5
7 3 .7
7 3 .9
7 4 .2
7 4 .4

0 .7
0 .3
0 .5
0 .1
0 .1

7 2 .0
7 2 .9
7 2 .6
7 3 .3
7 4 .2

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

7 .0
8 .0
8 .8
9 .1
9 .5
9 .4
9 .4
9 .2
8 .8
8 .4
8 .1
7 .7
7 .9
8 .0
8 .0
8 .3
8 .7
8 .5
8 .5
8 .4
8 .4
8 .3
8 .0

8 .8
8 .2
7 .9
8 .5
8 .2

2 3 .3
2 1 .6
2 1 .9
2 1 .5
2 1 .1
2 1 .3
2 1 .3
2 1 .6
2 2 .3
2 3 .3
2 3 .9
2 4 .2
2 2 .6
2 3 .1
2 2 .5
2 1 .9
2 1 .7
2 2 .0
2 2 .5
2 2 .6
2 1 .1
2 0 .3
2 0 .6

2 1 .9
2 2 .7
2 3 .3
2 2 .1
2 0 .6

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

40

GRAPH A1.3 : GERMANY OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%

Output gap

5%

4%

3%

2%

1%

0%

-1%

-2%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

4%

3%

2%

1%

0%

-1%

-2%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

75%

74%

73%

72%

71%

70%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

41

TABLE A1.4 : GREECE OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

0 .7
-1 .5
-3 .4
-2 .2
-0 .5
-0 .8
-3 .9
-0 .8
1 .8
0 .6
2 .3
1 .5
-1 .9
-1 .8
-1 .9
-2 .0
-1 .1
-0 .8
-0 .4
0 .2
0 .8
0 .9
1 .4

-1 .0
-0 .6
-0 .4
-0 .8
1 .0

0 .0
-1 .9
-3 .8
-2 .4
-0 .5
-0 .6
-3 .3
0 .1
2 .8
1 .3
2 .3
1 .2
-2 .2
-2 .0
-2 .0
-2 .0
-1 .1
-0 .3
0 .4
1 .2
1 .9
2 .6
3 .5

-0 .8
-0 .5
-0 .5
-0 .4
2 .6

1 .4
1 .1
0 .9
0 .8
0 .8
0 .8
0 .9
1 .0
1 .1
1 .3
1 .4
1 .5
1 .7
1 .9
2 .2
2 .5
2 .8
3 .0
3 .2
3 .4
3 .5
3 .6
3 .7

1 .0
2 .4
1 .7
3 .0
3 .6

1 .5
0 .8
0 .8
0 .6
0 .5
0 .7
0 .4
0 .8
1 .1
1 .5
2 .1
1 .8
1 .8
1 .9
2 .0
2 .4
2 .7
2 .5
2 .8
3 .3
3 .3
3 .1
3 .3

0 .9
2 .3
1 .9
2 .8
3 .2

0 .9
0 .6
0 .6
0 .7
0 .4
0 .4
0 .1
0 .2
0 .2
0 .5
0 .9
0 .6
0 .5
0 .5
0 .4
0 .5
0 .5
0 .1
0 .2
0 .5
0 .5
0 .2
0 .5

0 .5
0 .5
0 .6
0 .3
0 .4

1 .4
1 .2
1 .3
0 .9
1 .0
1 .0
0 .9
0 .9
1 .0
1 .0
1 .0
0 .9
0 .8
0 .7
0 .7
0 .8
0 .9
1 .0
1 .0
1 .1
1 .2
1 .3
1 .4

P erio d  A v era g es

1 .1
0 .9
0 .9
1 .0
1 .3

-0 .8
-1 .0
-1 .1
-1 .0
-0 .9
-0 .7
-0 .5
-0 .3
-0 .2
0 .0
0 .1
0 .3
0 .4
0 .6
0 .8
1 .1
1 .3
1 .5
1 .6
1 .7
1 .6
1 .5
1 .4

-0 .6
0 .9
0 .5
1 .4
1 .5

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .5
1 .1
1 .1
1 .0
0 .9
0 .8
0 .6
0 .6
0 .7
0 .8
1 .6
1 .1
0 .8
0 .6
0 .4
0 .3
0 .3
0 .1
0 .1
0 .0
0 .2
0 .2
0 .2

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
5 7 .4
5 7 .7
5 7 .9
5 8 .1
5 8 .3
5 8 .4
5 8 .4
5 8 .5
5 8 .5
5 8 .6
5 8 .7
5 8 .9
5 9 .1
5 9 .4
5 9 .8
6 0 .1
6 0 .5
6 0 .8
6 1 .2
6 1 .4
6 1 .7
6 1 .9
6 2 .1

0 .9
0 .5
0 .9
0 .2
0 .2

5 8 .2
6 0 .0
5 9 .2
6 0 .8
6 1 .9

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

4 .2
4 .9
5 .5
5 .8
6 .3
6 .6
7 .1
7 .4
7 .8
8 .0
8 .3
8 .8
9 .2
9 .5
9 .8
1 0 .0
1 0 .1
1 0 .6
1 0 .9
1 0 .6
1 0 .4
1 0 .6
1 0 .4

6 .4
9 .8
9 .1
1 0 .4
1 0 .5

2 0 .4
1 9 .8
2 0 .6
1 7 .3
1 8 .8
1 8 .6
1 7 .4
1 8 .4
1 9 .5
2 0 .2
2 0 .7
1 9 .7
1 8 .7
1 7 .8
1 8 .2
1 9 .3
2 0 .1
2 1 .7
2 2 .4
2 3 .3
2 4 .2
2 5 .8
2 7 .4

1 9 .1
2 0 .2
1 9 .0
2 1 .3
2 5 .8

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

42

GRAPH A1.4 : GREECE OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%
4%
3%
2%
1%
0%
-1%
-2%
-3%

Output gap

4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

4%

3%

2%

1%

0%

-1%

-2%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

6%

4%

2%

0%

-2%

-4%

-6%

-8%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

14%

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

63%

62%

61%

60%

59%

58%

57%

56%

1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

43

TABLE A1.5 : SPAIN OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-2 .4
-3 .0
-3 .1
-3 .5
-3 .6
-3 .1
-0 .6
1 .5
3 .3
4 .2
3 .9
2 .1
-1 .6
-2 .0
-2 .0
-2 .4
-1 .5
-0 .3
0 .7
1 .6
1 .2
0 .3
0 .4

-1 .0
-0 .2
0 .1
-0 .4
0 .6

-2 .6
-3 .0
-3 .3
-3 .0
-2 .6
-2 .0
0 .5
2 .4
3 .2
3 .5
2 .7
0 .8
-1 .9
-2 .0
-2 .4
-2 .4
-1 .2
0 .2
0 .8
1 .3
0 .7
-0 .2
-0 .3

-0 .7
-0 .4
-0 .6
-0 .3
0 .1

1 .7
1 .8
2 .0
2 .2
2 .4
2 .7
2 .9
3 .0
3 .0
2 .9
2 .8
2 .7
2 .7
2 .7
2 .8
2 .9
3 .0
3 .1
3 .1
3 .2
3 .1
3 .1
3 .1

2 .5
2 .9
2 .8
3 .1
3 .1

1 .4
1 .7
2 .1
1 .4
1 .9
2 .7
2 .9
3 .1
4 .0
3 .5
3 .4
2 .8
1 .7
2 .5
3 .1
2 .5
2 .7
2 .9
3 .6
3 .5
3 .3
3 .1
3 .3

2 .5
2 .9
2 .7
3 .0
3 .2

-0 .9
-0 .6
-0 .1
-0 .6
-0 .1
0 .5
0 .6
0 .6
1 .2
0 .8
0 .9
0 .6
0 .0
0 .9
1 .5
1 .0
1 .2
1 .4
2 .0
2 .0
2 .0
1 .8
2 .0

0 .1
1 .2
0 .8
1 .5
1 .9

1 .0
0 .9
0 .8
0 .6
0 .7
0 .9
1 .1
1 .4
1 .6
1 .7
1 .6
1 .3
1 .0
1 .0
1 .1
1 .0
1 .1
1 .2
1 .4
1 .4
1 .4
1 .3
1 .3

P erio d  A v era g es

1 .1
1 .2
1 .2
1 .2
1 .3

1 .4
1 .4
1 .4
1 .4
1 .3
1 .3
1 .2
1 .2
1 .1
1 .0
0 .9
0 .8
0 .7
0 .7
0 .6
0 .4
0 .4
0 .3
0 .2
0 .1
0 .0
0 .0
0 .0

1 .3
0 .5
0 .7
0 .3
0 .0

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .2
1 .1
1 .1
1 .0
0 .9
0 .8
0 .8
0 .8
0 .8
0 .7
0 .8
0 .8
0 .7
0 .6
0 .5
0 .4
0 .3
0 .3
0 .4
0 .8
0 .8
0 .6
0 .5

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
5 5 .7
5 5 .5
5 5 .4
5 5 .4
5 5 .5
5 5 .8
5 6 .0
5 6 .4
5 6 .7
5 7 .0
5 7 .4
5 7 .7
5 8 .1
5 8 .5
5 8 .8
5 9 .3
5 9 .7
6 0 .1
6 0 .6
6 1 .1
6 1 .5
6 2 .0
6 2 .4

0 .9
0 .5
0 .7
0 .4
0 .7

5 6 .0
5 9 .1
5 8 .1
6 0 .1
6 2 .0

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

1 3 .8
1 5 .3
1 6 .2
1 7 .8
1 8 .9
1 9 .2
1 9 .6
1 9 .9
1 9 .4
1 9 .6
1 9 .5
1 9 .9
2 0 .9
2 0 .9
2 0 .0
1 9 .6
1 8 .9
1 8 .0
1 6 .5
1 5 .2
1 4 .0
1 2 .8
1 1 .3

1 8 .0
1 8 .9
2 0 .2
1 7 .6
1 2 .7

1 8 .6
1 8 .5
1 7 .9
1 6 .8
1 7 .6
1 8 .9
2 0 .6
2 2 .7
2 4 .5
2 5 .2
2 4 .8
2 3 .1
2 0 .7
2 0 .5
2 1 .5
2 1 .4
2 1 .8
2 3 .3
2 4 .5
2 5 .0
2 4 .8
2 4 .5
2 4 .7

2 0 .1
2 2 .6
2 2 .1
2 3 .2
2 4 .6

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

44

GRAPH A1.5 : SPAIN OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

6%
5%
4%
3%
2%
1%
0%
-1%
-2%

Output gap

4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

5%

4%

3%

2%

1%

0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

30%

25%

20%

15%

10%

5%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

63%
62%
61%
60%
59%
58%
57%
56%
55%
54%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

45

TABLE A1.6 : FRANCE OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .6
-0 .2
-0 .9
-1 .4
-2 .1
-1 .9
-1 .7
0 .6
2 .6
3 .1
2 .1
1 .7
-1 .0
-0 .8
-1 .0
-1 .8
-1 .9
-0 .7
0 .0
0 .8
0 .5
-0 .2
0 .2

-0 .2
-0 .3
0 .2
-0 .7
0 .1

-0 .5
-0 .3
-1 .3
-1 .7
-2 .2
-1 .9
-1 .5
0 .5
2 .0
2 .3
1 .3
1 .0
-1 .4
-0 .9
-1 .0
-1 .7
-1 .7
-0 .4
0 .2
0 .9
0 .4
-0 .6
-0 .3

-0 .5
-0 .4
-0 .2
-0 .5
-0 .2

2 .3
2 .2
2 .2
2 .2
2 .2
2 .2
2 .3
2 .2
2 .2
2 .1
2 .0
1 .9
1 .8
1 .8
1 .9
1 .9
2 .0
2 .1
2 .2
2 .3
2 .3
2 .4
2 .4

2 .2
2 .0
1 .9
2 .1
2 .4

2 .5
2 .4
2 .4
2 .1
2 .1
2 .1
2 .2
2 .5
2 .6
2 .4
2 .0
1 .8
1 .5
1 .6
1 .7
1 .8
1 .9
2 .0
2 .4
2 .4
2 .5
2 .6
2 .5

2 .3
1 .9
1 .7
2 .1
2 .6

0 .3
0 .3
0 .4
0 .2
0 .1
0 .1
0 .1
0 .3
0 .4
0 .3
0 .1
0 .1
0 .1
0 .2
0 .4
0 .5
0 .6
0 .6
0 .9
0 .8
0 .9
1 .0
0 .8

0 .3
0 .4
0 .2
0 .7
0 .9

1 .0
0 .9
0 .8
0 .7
0 .7
0 .7
0 .8
0 .9
1 .0
1 .0
0 .9
0 .8
0 .6
0 .6
0 .6
0 .5
0 .5
0 .6
0 .6
0 .7
0 .7
0 .7
0 .7

P erio d  A v era g es

0 .9
0 .6
0 .7
0 .6
0 .7

1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .1
1 .1
1 .0
0 .9
0 .8
0 .8
0 .8
0 .8
0 .8
0 .8
0 .9
0 .9
0 .9
0 .9
0 .9

1 .2
0 .9
0 .9
0 .8
0 .9

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .4
1 .4
1 .3
1 .1
0 .8
0 .5
0 .6
0 .6
0 .5
0 .4
0 .2
0 .2
0 .2
0 .2
0 .2
0 .3
0 .3
0 .3
0 .3
0 .4
0 .5
0 .5
0 .5

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 6 .5
6 6 .3
6 6 .1
6 6 .0
6 5 .8
6 5 .7
6 5 .7
6 5 .7
6 5 .8
6 5 .9
6 6 .1
6 6 .2
6 6 .5
6 6 .7
6 7 .0
6 7 .3
6 7 .6
6 7 .9
6 8 .3
6 8 .6
6 9 .0
6 9 .3
6 9 .7

0 .9
0 .3
0 .2
0 .3
0 .5

6 6 .0
6 7 .2
6 6 .5
6 7 .9
6 9 .3

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

7 .1
7 .6
7 .9
8 .5
8 .8
9 .0
9 .4
9 .4
9 .5
9 .6
9 .9
1 0 .2
1 0 .5
1 0 .7
1 0 .8
1 0 .8
1 0 .6
1 0 .5
1 0 .0
9 .7
9 .4
8 .8
8 .5

8 .7
1 0 .4
1 0 .4
1 0 .3
8 .9

1 9 .4
1 8 .9
1 8 .1
1 7 .5
1 7 .7
1 8 .4
1 9 .1
2 0 .4
2 1 .3
2 1 .5
2 0 .8
2 0 .1
1 8 .6
1 8 .5
1 8 .6
1 8 .3
1 7 .9
1 8 .8
1 9 .5
2 0 .2
2 0 .3
1 9 .7
1 9 .8

1 9 .2
1 9 .1
1 9 .3
1 8 .9
1 9 .9

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

46

GRAPH A1.6 : FRANCE OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

-2%

Output gap

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

14%

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

70%

69%

68%

67%

66%

65%

64%

1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

47

TABLE A1.7 : IRELAND OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

2 .8
1 .9
-1 .3
-0 .1
-0 .1
-3 .0
-2 .0
-1 .7
0 .2
3 .1
0 .0
-2 .0
-5 .0
-5 .7
-3 .1
-2 .8
-0 .1
0 .6
3 .3
6 .8
6 .0
2 .3
1 .5

0 .0
-0 .8
-3 .1
1 .6
3 .3

1 .1
0 .0
-3 .4
-2 .3
-2 .2
-4 .7
-3 .4
-2 .7
-0 .4
2 .9
-0 .3
-2 .2
-4 .8
-5 .3
-2 .4
-2 .0
0 .6
0 .6
2 .8
5 .9
4 .7
0 .8
-0 .3

-1 .5
-0 .7
-3 .0
1 .6
1 .7

3 .3
3 .1
3 .0
3 .0
3 .1
3 .3
3 .6
3 .9
4 .2
4 .6
5 .0
5 .5
6 .0
6 .5
7 .0
7 .5
7 .8
7 .9
7 .9
7 .8
7 .5
7 .2
7 .0

3 .5
6 .9
6 .0
7 .8
7 .3

3 .9
3 .4
3 .3
3 .1
3 .0
2 .9
3 .3
3 .5
3 .7
4 .3
5 .1
5 .4
5 .5
6 .3
6 .8
7 .4
8 .0
8 .6
8 .5
8 .2
8 .0
7 .4
7 .3

3 .4
7 .0
5 .8
8 .1
7 .6

0 .4
0 .1
0 .3
0 .1
0 .0
-0 .1
0 .1
0 .2
0 .1
0 .3
1 .3
1 .5
1 .5
2 .0
2 .2
2 .4
2 .7
2 .9
2 .6
2 .5
2 .4
2 .1
2 .0

0 .1
2 .2
1 .7
2 .6
2 .2

1 .9
1 .7
1 .3
1 .2
1 .0
0 .9
0 .8
0 .7
0 .9
1 .1
0 .8
0 .8
0 .6
0 .7
0 .9
1 .1
1 .4
1 .7
1 .9
2 .0
1 .8
1 .7
1 .7

P erio d  A v era g es

1 .1
1 .2
0 .8
1 .6
1 .7

1 .6
1 .6
1 .7
1 .8
2 .0
2 .2
2 .4
2 .5
2 .7
2 .8
2 .9
3 .1
3 .2
3 .4
3 .5
3 .6
3 .7
3 .7
3 .7
3 .6
3 .5
3 .5
3 .4

2 .1
3 .4
3 .2
3 .7
3 .5

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .5
1 .2
1 .4
1 .2
0 .7
0 .4
0 .5
0 .3
-0 .3
0 .2
1 .4
1 .6
1 .2
1 .5
1 .8
1 .8
2 .0
2 .1
1 .8
1 .8
2 .0
1 .7
1 .7

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 2 .1
6 2 .0
6 1 .9
6 1 .8
6 1 .6
6 1 .5
6 1 .4
6 1 .4
6 1 .4
6 1 .5
6 1 .7
6 2 .0
6 2 .3
6 2 .8
6 3 .3
6 4 .0
6 4 .7
6 5 .5
6 6 .3
6 7 .1
6 7 .9
6 8 .8
6 9 .6

0 .7
1 .7
1 .5
1 .9
1 .8

6 1 .7
6 4 .0
6 2 .4
6 5 .5
6 8 .8

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

1 1 .0
1 1 .8
1 2 .4
1 3 .1
1 3 .5
1 3 .9
1 4 .0
1 3 .9
1 3 .6
1 3 .5
1 3 .3
1 3 .0
1 2 .5
1 1 .7
1 1 .1
1 0 .2
9 .3
8 .2
7 .4
6 .7
6 .3
6 .0
5 .8

1 3 .1
1 0 .4
1 2 .3
8 .4
6 .0

2 7 .3
2 5 .5
2 2 .5
2 1 .2
1 9 .0
1 8 .4
1 7 .4
1 6 .6
1 8 .5
1 9 .9
1 7 .6
1 6 .7
1 5 .0
1 5 .8
1 6 .8
1 8 .2
1 9 .9
2 1 .2
2 2 .2
2 2 .0
2 0 .6
1 9 .6
1 9 .0

2 0 .6
1 8 .5
1 6 .4
2 0 .7
1 9 .7

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

48

GRAPH A1.7 : IRELAND OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

14%
12%
10%
8%
6%
4%
2%
0%
-2%

Output gap

8%

6%

4%

2%

0%

-2%

-4%

-6%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

10%

8%

6%

4%

2%

0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

72%

70%

68%

66%

64%

62%

60%

58%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

49

TABLE A1.8 : ITALY OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

0 .8
-1 .0
-2 .2
-1 .8
-1 .2
-1 .1
-0 .4
1 .3
2 .1
2 .1
1 .7
0 .7
-1 .8
-1 .3
-0 .1
-0 .7
-0 .4
-0 .4
-0 .7
0 .2
0 .1
-0 .5
0 .1

-0 .1
-0 .3
-0 .2
-0 .4
-0 .1

0 .9
-1 .1
-2 .6
-2 .3
-1 .7
-1 .3
-0 .4
1 .4
2 .2
2 .0
1 .4
0 .3
-1 .9
-1 .2
0 .2
-0 .4
-0 .1
-0 .2
-0 .5
0 .2
-0 .3
-1 .2
-0 .9

-0 .3
-0 .2
-0 .3
-0 .2
-0 .8

2 .6
2 .5
2 .4
2 .4
2 .4
2 .3
2 .3
2 .2
2 .1
2 .0
1 .8
1 .7
1 .7
1 .7
1 .7
1 .7
1 .7
1 .8
1 .9
1 .9
2 .0
2 .0
2 .0

2 .3
1 .8
1 .7
1 .8
2 .0

2 .8
2 .6
2 .8
2 .4
2 .3
2 .1
2 .1
2 .2
2 .0
2 .2
2 .0
1 .9
1 .3
1 .5
1 .5
1 .7
1 .7
1 .9
1 .9
2 .1
2 .3
2 .3
2 .4

2 .4
1 .8
1 .6
1 .9
2 .3

0 .5
0 .5
0 .8
0 .4
0 .3
0 .0
0 .0
0 .0
-0 .1
0 .0
-0 .1
-0 .1
-0 .4
-0 .1
-0 .2
0 .0
0 .2
0 .3
0 .4
0 .5
0 .7
0 .5
0 .6

0 .2
0 .0
-0 .2
0 .3
0 .6

1 .1
1 .0
0 .9
0 .9
0 .8
0 .8
0 .8
0 .9
0 .9
1 .0
0 .9
0 .8
0 .5
0 .5
0 .6
0 .6
0 .6
0 .6
0 .7
0 .8
0 .8
0 .8
0 .8

P erio d  A v era g es

0 .9
0 .7
0 .7
0 .7
0 .8

1 .2
1 .1
1 .1
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .2
1 .1
1 .1
1 .0
1 .0
0 .9
0 .9
0 .8
0 .9
0 .9
1 .0

1 .2
1 .0
1 .1
0 .9
0 .9

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .0
1 .1
1 .1
1 .0
0 .6
0 .3
0 .4
0 .3
0 .3
0 .3
0 .2
0 .2
0 .2
0 .1
-0 .1
-0 .1
0 .0
-0 .1
-0 .2
-0 .1
-0 .1
-0 .1
-0 .3

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
5 9 .2
5 9 .2
5 9 .2
5 9 .2
5 9 .1
5 9 .1
5 9 .1
5 9 .1
5 9 .0
5 8 .9
5 8 .8
5 8 .7
5 8 .6
5 8 .5
5 8 .5
5 8 .5
5 8 .7
5 8 .9
5 9 .2
5 9 .6
5 9 .9
6 0 .4
6 0 .8

0 .7
0 .0
0 .1
-0 .1
-0 .2

5 9 .1
5 8 .8
5 8 .6
5 9 .0
6 0 .4

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

7 .5
7 .8
7 .7
8 .0
8 .2
8 .4
8 .8
9 .1
9 .5
9 .6
9 .8
9 .9
1 0 .4
1 0 .6
1 0 .8
1 0 .8
1 0 .9
1 0 .7
1 0 .5
1 0 .3
9 .9
9 .6
9 .2

8 .5
1 0 .5
1 0 .3
1 0 .6
9 .6

2 1 .3
2 0 .0
1 9 .2
1 9 .4
1 9 .1
1 9 .1
1 9 .5
2 0 .4
2 0 .8
2 1 .2
2 1 .0
2 0 .3
1 7 .9
1 7 .6
1 8 .4
1 8 .7
1 8 .8
1 9 .2
1 9 .9
2 0 .7
2 0 .7
2 0 .9
2 1 .4

2 0 .0
1 9 .2
1 9 .0
1 9 .5
2 1 .0

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

50

GRAPH A1.8 : ITALY OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

-2%

Output gap

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

14%

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

62%

61%

60%

59%

58%

57%

1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

51

TABLE A1.9 : LUXEMBOURG OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-2 .9
-4 .5
-4 .7
-2 .4
-3 .6
-0 .6
-3 .0
1 .9
6 .4
3 .2
2 .7
1 .3
0 .4
-0 .8
-2 .6
-4 .0
-0 .6
-0 .2
0 .5
2 .6
2 .5
0 .3
0 .5

-1 .0
-0 .1
0 .2
-0 .4
1 .1

-3 .8
-5 .8
-5 .5
-2 .8
-2 .5
0 .9
-1 .4
3 .1
7 .6
4 .1
2 .6
1 .3
0 .0
-0 .6
-2 .2
-3 .2
-0 .1
0 .2
-0 .3
1 .2
0 .5
-2 .1
-2 .5

-0 .6
-0 .1
0 .2
-0 .4
-1 .4

2 .5
2 .8
3 .2
3 .7
4 .1
4 .5
4 .8
5 .1
5 .2
5 .2
5 .1
5 .1
5 .0
5 .1
5 .1
5 .2
5 .3
5 .3
5 .3
5 .3
5 .2
5 .1
5 .0

4 .1
5 .2
5 .1
5 .3
5 .1

2 .9
3 .3
2 .7
3 .1
2 .7
4 .0
4 .8
5 .6
5 .3
5 .5
6 .1
5 .0
5 .4
4 .4
4 .9
4 .7
5 .6
5 .5
6 .5
6 .0
5 .8
5 .6
5 .7

4 .0
5 .4
5 .2
5 .7
5 .7

0 .4
0 .4
0 .1
0 .5
0 .3
0 .4
0 .4
0 .5
0 .4
0 .5
0 .7
0 .6
0 .7
0 .6
0 .9
0 .9
1 .1
1 .2
1 .5
1 .6
1 .4
1 .5
1 .4

0 .4
1 .0
0 .7
1 .3
1 .4

0 .4
0 .5
-0 .1
-0 .4
-0 .9
0 .2
0 .7
1 .4
1 .4
1 .8
2 .4
1 .6
2 .1
1 .4
1 .6
1 .5
2 .2
2 .0
2 .8
2 .1
2 .1
1 .8
1 .8

P erio d  A v era g es

0 .5
2 .0
1 .8
2 .1
1 .9

2 .0
2 .3
2 .7
3 .0
3 .3
3 .5
3 .5
3 .5
3 .4
3 .1
2 .9
2 .7
2 .5
2 .4
2 .3
2 .2
2 .2
2 .2
2 .1
2 .1
2 .2
2 .3
2 .4

3 .0
2 .4
2 .6
2 .2
2 .3

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
0 .9
0 .7
0 .7
0 .7
0 .5
0 .7
0 .7
0 .7
0 .7
0 .8
1 .0
0 .9
0 .9
0 .9
1 .0
1 .0
0 .9
1 .1
1 .2
1 .3
0 .9
0 .9
1 .0

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 2 .0
6 1 .9
6 1 .8
6 1 .7
6 1 .6
6 1 .5
6 1 .5
6 1 .5
6 1 .5
6 1 .5
6 1 .6
6 1 .6
6 1 .7
6 1 .9
6 2 .1
6 2 .4
6 2 .8
6 3 .4
6 4 .1
6 4 .8
6 5 .7
6 6 .6
6 7 .5

0 .7
1 .0
0 .9
1 .1
0 .9

6 1 .6
6 2 .6
6 1 .8
6 3 .5
6 6 .6

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

2 .3
2 .2
2 .5
2 .3
2 .3
2 .3
2 .3
2 .2
2 .2
2 .3
2 .3
2 .3
2 .4
2 .6
2 .5
2 .6
2 .5
2 .6
2 .5
2 .6
2 .7
2 .7
2 .9

2 .3
2 .5
2 .4
2 .5
2 .8

2 0 .6
1 9 .8
1 7 .0
1 6 .5
1 4 .6
1 8 .3
2 0 .6
2 2 .5
2 2 .9
2 3 .3
2 5 .4
2 3 .6
2 4 .0
2 0 .9
2 1 .3
2 0 .7
2 2 .4
2 1 .8
2 4 .5
2 2 .4
2 2 .4
2 1 .1
2 1 .0

1 9 .6
2 2 .7
2 3 .0
2 2 .3
2 1 .5

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

52

GRAPH A1.9 : LUXEMBOURG OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

12%

10%

8%

6%

4%

2%

0%

-2%

Output gap

10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

7%
6%
5%
4%
3%
2%
1%
0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

10%

8%

6%

4%

2%

0%

-2%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

70%

68%

66%

64%

62%

60%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

53

TALBE A1.10 : NETHERLANDS OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .7
-3 .4
-3 .4
-2 .1
-1 .1
-0 .7
-1 .6
-1 .2
1 .0
2 .3
2 .0
0 .9
-1 .0
-1 .3
-1 .3
-1 .2
-0 .4
0 .9
1 .7
2 .4
0 .8
-0 .3
-0 .1

-1 .1
0 .3
-0 .2
0 .7
0 .1

-0 .8
-2 .7
-3 .3
-1 .7
-0 .9
-0 .7
-1 .9
-1 .4
0 .8
2 .0
1 .8
0 .6
-1 .1
-1 .1
-0 .9
-0 .7
0 .0
1 .2
1 .8
2 .2
0 .5
-0 .9
-0 .8

-1 .1
0 .4
-0 .1
0 .9
-0 .4

1 .6
1 .6
1 .7
1 .9
2 .1
2 .3
2 .4
2 .6
2 .7
2 .8
2 .8
2 .8
2 .8
2 .9
2 .9
3 .0
3 .0
3 .0
2 .9
2 .8
2 .7
2 .6
2 .5

2 .2
2 .9
2 .9
2 .9
2 .6

1 .3
0 .8
2 .3
1 .6
2 .2
2 .5
2 .7
2 .6
2 .7
2 .9
2 .7
2 .9
2 .6
2 .6
2 .7
2 .9
3 .1
3 .1
3 .1
3 .1
2 .8
2 .9
2 .6

2 .2
2 .9
2 .7
3 .1
2 .8

0 .2
-0 .2
1 .2
0 .4
0 .9
1 .0
1 .1
1 .0
1 .0
1 .2
1 .1
1 .3
1 .1
1 .1
1 .2
1 .3
1 .4
1 .4
1 .4
1 .4
1 .3
1 .4
1 .2

0 .8
1 .3
1 .2
1 .4
1 .3

0 .6
0 .5
0 .5
0 .6
0 .7
0 .8
0 .7
0 .8
0 .8
0 .7
0 .7
0 .6
0 .5
0 .5
0 .6
0 .7
0 .8
0 .8
0 .9
0 .9
0 .8
0 .7
0 .7

P erio d  A v era g es

0 .7
0 .7
0 .6
0 .8
0 .7

0 .5
0 .5
0 .6
0 .6
0 .7
0 .7
0 .8
0 .8
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .9
0 .8
0 .8
0 .8
0 .8

0 .7
0 .9
0 .9
0 .9
0 .8

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .3
1 .1
1 .1
1 .2
1 .1
1 .0
0 .9
0 .8
0 .6
0 .6
0 .6
0 .6
0 .5
0 .4
0 .3
0 .3
0 .4
0 .4
0 .5
0 .6
0 .6
0 .6
0 .6

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 6 .9
6 6 .7
6 6 .5
6 6 .4
6 6 .4
6 6 .5
6 6 .8
6 7 .1
6 7 .6
6 8 .2
6 8 .9
6 9 .6
7 0 .4
7 1 .2
7 2 .0
7 2 .9
7 3 .8
7 4 .7
7 5 .7
7 6 .6
7 7 .5
7 8 .4
7 9 .3

1 .0
0 .5
0 .5
0 .4
0 .6

6 6 .9
7 2 .6
7 0 .4
7 4 .8
7 8 .4

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

8 .0
9 .1
8 .2
8 .4
8 .2
7 .8
7 .4
7 .2
7 .0
6 .6
6 .5
6 .1
6 .0
5 .9
5 .6
5 .3
4 .8
4 .3
3 .9
3 .6
3 .5
3 .1
3 .0

7 .8
5 .2
6 .0
4 .4
3 .2

1 9 .8
1 8 .9
1 8 .9
1 9 .7
2 0 .6
2 1 .5
2 1 .1
2 1 .7
2 2 .2
2 2 .2
2 1 .6
2 1 .2
2 0 .0
1 9 .9
2 0 .1
2 0 .8
2 1 .5
2 1 .7
2 2 .7
2 2 .9
2 2 .0
2 1 .2
2 1 .2

2 0 .7
2 1 .2
2 0 .6
2 1 .9
2 1 .5

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

54

GRAPH A1.10 : NETHERLANDS OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

6%
5%
4%
3%
2%
1%
0%
-1%
-2%

Output gap

3%

2%

1%

0%

-1%

-2%

-3%

-4%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

14%

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

85%

80%

75%

70%

65%

60%

1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

55

TABLE A1.11 : AUSTRIA OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .7
-0 .8
-0 .1
-1 .8
-1 .6
-1 .8
-2 .6
-1 .8
-0 .2
1 .8
2 .4
2 .2
0 .1
0 .3
-0 .4
-0 .7
-1 .3
-0 .1
0 .6
1 .4
0 .3
-0 .5
0 .1

-1 .0
0 .5
0 .9
0 .0
0 .0

-1 .3
-1 .7
-0 .8
-2 .3
-1 .7
-1 .2
-1 .9
-1 .0
0 .6
2 .2
2 .4
2 .0
-0 .5
-0 .2
-0 .6
-0 .7
-1 .3
0 .1
0 .5
1 .2
0 .2
-0 .4
0 .1

-0 .9
0 .3
0 .6
0 .0
0 .0

2 .2
2 .2
2 .1
2 .2
2 .2
2 .3
2 .5
2 .6
2 .6
2 .7
2 .6
2 .6
2 .5
2 .4
2 .3
2 .3
2 .3
2 .2
2 .2
2 .1
2 .1
2 .0
2 .0

2 .4
2 .4
2 .5
2 .2
2 .0

2 .8
2 .4
2 .0
2 .0
1 .8
1 .5
2 .4
2 .5
2 .6
3 .0
3 .1
2 .7
3 .0
2 .3
2 .0
2 .0
2 .2
2 .1
2 .3
2 .2
2 .1
1 .8
2 .0

2 .3
2 .4
2 .6
2 .2
2 .0

1 .1
1 .1
0 .7
0 .7
0 .4
0 .1
0 .8
0 .7
0 .8
1 .1
1 .2
0 .8
1 .3
0 .5
0 .3
0 .3
0 .4
0 .3
0 .5
0 .4
0 .4
0 .2
0 .4

0 .7
0 .6
0 .8
0 .4
0 .3

1 .2
0 .9
0 .9
0 .8
0 .9
0 .9
0 .9
1 .0
1 .0
1 .1
1 .2
1 .1
1 .0
1 .1
1 .0
1 .0
1 .0
1 .0
1 .0
1 .0
0 .9
0 .9
0 .9

P erio d  A v era g es

1 .0
1 .0
1 .1
1 .0
0 .9

0 .5
0 .4
0 .4
0 .4
0 .5
0 .6
0 .7
0 .8
0 .8
0 .8
0 .8
0 .7
0 .7
0 .7
0 .7
0 .7
0 .8
0 .8
0 .8
0 .8
0 .8
0 .8
0 .7

0 .6
0 .7
0 .7
0 .8
0 .8

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .4
1 .3
0 .9
1 .0
0 .6
0 .3
0 .2
0 .2
0 .3
1 .2
1 .3
0 .6
1 .8
0 .3
0 .1
0 .2
0 .3
0 .2
0 .4
0 .4
0 .1
0 .2
0 .2

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 4 .5
6 4 .7
6 5 .0
6 5 .3
6 5 .7
6 6 .1
6 6 .5
6 7 .0
6 7 .4
6 7 .9
6 8 .4
6 8 .9
6 9 .4
6 9 .9
7 0 .3
7 0 .6
7 0 .8
7 1 .1
7 1 .3
7 1 .5
7 1 .6
7 1 .8
7 1 .9

0 .7
0 .5
0 .8
0 .3
0 .2

6 6 .0
7 0 .2
6 9 .4
7 1 .0
7 1 .8

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

1 .8
1 .8
2 .1
2 .5
2 .9
3 .7
3 .3
3 .1
2 .9
3 .1
3 .3
3 .3
3 .7
3 .8
4 .0
4 .2
4 .2
4 .3
4 .1
4 .1
3 .8
3 .8
3 .7

2 .7
3 .9
3 .6
4 .2
3 .7

2 3 .4
2 1 .0
2 0 .8
2 0 .3
2 1 .1
2 1 .1
2 1 .4
2 2 .4
2 2 .7
2 3 .4
2 4 .2
2 3 .7
2 2 .8
2 3 .3
2 3 .1
2 3 .2
2 3 .1
2 3 .4
2 3 .2
2 3 .9
2 3 .0
2 2 .7
2 3 .2

2 1 .8
2 3 .4
2 3 .4
2 3 .4
2 3 .0

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

56

GRAPH A1.11 : AUSTRIA OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%

4%

3%

2%

1%

0%

-1%

Output gap

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

3%

2%

1%

0%

-1%

-2%

-3%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

5%

4%

3%

2%

1%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

74%

72%

70%

68%

66%

64%

62%

2.0%

1.5%

1.0%

0.5%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

57

TABLE A1.12 : PORTUGAL OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

2 .2
1 .6
-1 .3
-5 .8
-6 .0
-5 .2
-2 .6
1 .1
3 .9
4 .3
5 .4
3 .2
-1 .8
-3 .8
-2 .5
-1 .7
-0 .7
0 .9
1 .5
2 .2
1 .4
0 .5
0 .4

-0 .8
0 .3
0 .1
0 .4
0 .8

1 .3
0 .2
-2 .8
-6 .9
-6 .5
-5 .1
-2 .5
1 .1
4 .1
4 .7
5 .5
3 .2
-1 .6
-3 .3
-1 .8
-0 .7
0 .3
1 .2
1 .6
1 .8
-0 .1
-1 .6
-2 .6

-1 .2
0 .6
0 .4
0 .8
-1 .4

2 .8
2 .7
2 .7
2 .8
3 .0
3 .3
3 .5
3 .6
3 .6
3 .5
3 .3
3 .2
3 .0
3 .0
3 .0
3 .0
2 .9
2 .9
2 .8
2 .7
2 .5
2 .4
2 .3

3 .2
3 .0
3 .1
2 .8
2 .4

3 .5
3 .3
2 .8
2 .4
2 .4
2 .6
3 .5
3 .7
3 .4
3 .4
3 .5
3 .4
2 .7
2 .7
2 .7
2 .7
2 .9
3 .6
3 .0
3 .2
3 .6
3 .1
3 .2

3 .1
3 .0
3 .0
3 .1
3 .3

0 .8
0 .8
0 .6
0 .8
0 .7
0 .5
0 .9
0 .7
0 .3
0 .3
0 .6
0 .6
0 .4
0 .4
0 .6
0 .5
0 .4
0 .9
0 .4
0 .5
1 .2
0 .8
0 .9

0 .7
0 .5
0 .5
0 .5
1 .0

2 .1
2 .0
1 .6
0 .9
0 .7
0 .8
1 .2
1 .5
1 .4
1 .5
1 .4
1 .4
1 .1
1 .1
1 .1
1 .2
1 .5
1 .8
1 .8
1 .9
1 .7
1 .5
1 .4

P erio d  A v era g es

1 .4
1 .4
1 .2
1 .6
1 .5

0 .6
0 .5
0 .5
0 .7
0 .9
1 .2
1 .4
1 .5
1 .6
1 .5
1 .4
1 .3
1 .2
1 .2
1 .1
1 .0
0 .9
0 .8
0 .8
0 .7
0 .7
0 .8
0 .8

1 .0
1 .1
1 .3
0 .9
0 .8

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
1 .7
1 .1
1 .0
0 .9
0 .7
0 .4
0 .3
0 .3
0 .2
0 .2
0 .3
0 .5
0 .6
0 .6
0 .4
0 .3
0 .3
0 .3
0 .2
0 .3
1 .3
0 .7
0 .8

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
6 9 .1
6 9 .1
6 9 .1
6 9 .2
6 9 .3
6 9 .4
6 9 .5
6 9 .7
6 9 .9
7 0 .1
7 0 .3
7 0 .4
7 0 .6
7 0 .8
7 1 .0
7 1 .2
7 1 .5
7 1 .8
7 2 .1
7 2 .5
7 2 .8
7 3 .2
7 3 .5

0 .7
0 .4
0 .5
0 .3
0 .9

6 9 .4
7 1 .2
7 0 .6
7 1 .8
7 3 .2

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

8 .2
8 .0
8 .1
7 .9
7 .6
7 .4
6 .6
6 .2
6 .1
6 .1
5 .7
5 .5
5 .7
5 .9
5 .8
5 .7
5 .7
5 .1
5 .2
5 .1
5 .0
5 .0
4 .8

7 .2
5 .5
5 .7
5 .3
5 .0

2 4 .1
2 3 .9
2 1 .5
1 7 .4
1 6 .4
1 7 .7
2 0 .2
2 2 .3
2 2 .4
2 3 .3
2 3 .2
2 3 .5
2 1 .6
2 1 .6
2 2 .4
2 3 .2
2 5 .7
2 7 .6
2 8 .7
2 9 .1
2 8 .0
2 7 .3
2 7 .0

2 0 .9
2 4 .7
2 2 .5
2 6 .9
2 7 .4

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

58

GRAPH A1.12 : PORTUGAL OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

8%

6%

4%

2%

0%

-2%

-4%

Output gap

8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

labour

capital

TFP

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

6%

4%

2%

0%

-2%

-4%

-6%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

74%
73%
72%
71%
70%
69%
68%
67%
66%

1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

59

TABLE A1.13 : FINLAND OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-0 .5
-0 .5
-0 .7
-0 .2
0 .2
0 .2
2 .2
5 .0
8 .6
7 .2
-0 .8
-5 .3
-7 .8
-5 .9
-4 .6
-3 .3
-0 .3
1 .8
2 .4
4 .6
1 .9
0 .2
0 .2

2 .2
-1 .9
-4 .9
1 .0
0 .8

-1 .0
-1 .1
-1 .5
-1 .1
-0 .7
-0 .4
1 .6
4 .1
6 .5
3 .9
-4 .1
-7 .7
-9 .1
-7 .2
-6 .0
-4 .4
-1 .6
0 .4
0 .7
3 .2
0 .6
-0 .7
-0 .5

1 .0
-3 .6
-6 .8
-0 .4
-0 .2

3 .2
3 .1
3 .0
2 .9
2 .7
2 .5
2 .2
1 .9
1 .6
1 .4
1 .2
1 .3
1 .5
1 .9
2 .3
2 .7
3 .0
3 .2
3 .4
3 .4
3 .4
3 .3
3 .3

2 .4
2 .4
1 .7
3 .1
3 .3

2 .9
3 .2
3 .2
3 .0
2 .7
2 .2
2 .2
2 .2
2 .8
2 .6
1 .6
0 .5
0 .3
1 .9
2 .4
2 .4
3 .3
3 .2
3 .7
3 .1
3 .4
2 .9
3 .1

2 .7
2 .2
1 .3
3 .1
3 .1

0 .5
0 .7
0 .6
0 .6
0 .2
-0 .3
-0 .4
-0 .5
-0 .2
-0 .1
-0 .6
-1 .4
-1 .4
-0 .1
0 .1
-0 .1
0 .5
0 .3
0 .8
0 .3
0 .7
0 .4
0 .6

0 .1
-0 .2
-0 .7
0 .4
0 .6

1 .0
1 .0
1 .1
0 .9
0 .9
0 .9
0 .9
1 .1
1 .3
1 .1
0 .5
0 .0
-0 .3
-0 .4
-0 .2
-0 .1
0 .1
0 .3
0 .3
0 .4
0 .4
0 .4
0 .4

P erio d  A v era g es

1 .0
0 .1
-0 .1
0 .2
0 .4

1 .4
1 .4
1 .5
1 .5
1 .6
1 .6
1 .6
1 .6
1 .6
1 .6
1 .7
1 .9
2 .1
2 .3
2 .5
2 .6
2 .6
2 .6
2 .5
2 .4
2 .2
2 .1
2 .0

1 .5
2 .3
2 .1
2 .5
2 .1

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
0 .7
0 .8
0 .7
0 .6
0 .4
0 .1
0 .1
0 .0
0 .0
0 .3
0 .7
0 .2
0 .3
0 .2
0 .2
0 .2
0 .3
0 .4
0 .6
0 .2
0 .2
0 .1
0 .2

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
7 5 .2
7 5 .6
7 5 .8
7 6 .0
7 6 .0
7 6 .0
7 5 .9
7 5 .6
7 5 .4
7 5 .0
7 4 .6
7 4 .2
7 3 .8
7 3 .5
7 3 .3
7 3 .2
7 3 .2
7 3 .3
7 3 .4
7 3 .6
7 3 .8
7 4 .1
7 4 .3

0 .4
0 .3
0 .3
0 .3
0 .2

7 5 .6
7 3 .6
7 3 .9
7 3 .4
7 4 .1

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

3 .5
3 .7
3 .8
3 .7
3 .9
4 .4
4 .8
5 .3
5 .3
5 .2
6 .3
8 .0
9 .9
9 .8
9 .5
9 .8
9 .4
9 .4
8 .9
8 .9
8 .4
8 .2
7 .8

4 .4
9 .0
8 .7
9 .3
8 .1

2 4 .5
2 5 .0
2 5 .0
2 3 .8
2 3 .8
2 3 .6
2 4 .2
2 6 .3
2 8 .9
2 6 .9
2 1 .6
1 7 .9
1 4 .8
1 4 .2
1 5 .3
1 6 .2
1 7 .6
1 8 .6
1 8 .5
1 8 .8
1 8 .6
1 7 .8
1 7 .8

2 5 .2
1 7 .4
1 6 .8
1 8 .0
1 8 .1

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

60

GRAPH A1.13 : FINLAND OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%

Output gap

8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour
capital

TFP

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

6%

4%

2%

0%

-2%

-4%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

78%

77%

76%

75%

74%

73%

72%

71%

0.9%
0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

61

TABLE A1.14 : SWEDEN OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-1 .9
-2 .6
-2 .6
-0 .4
-0 .2
0 .6
2 .1
3 .0
4 .1
3 .7
1 .2
-1 .8
-5 .0
-2 .6
-0 .8
-1 .7
-1 .9
-0 .7
1 .3
2 .3
0 .9
0 .0
0 .2

0 .6
-1 .0
-1 .8
-0 .2
0 .4

-2 .1
-2 .5
-2 .3
-0 .1
0 .0
1 .0
2 .2
2 .6
3 .0
2 .0
-0 .4
-2 .7
-4 .4
-1 .9
-0 .5
-1 .0
-0 .7
-0 .1
1 .4
2 .2
0 .7
0 .1
0 .4

0 .4
-0 .8
-2 .0
0 .4
0 .4

1 .8
1 .8
1 .9
2 .0
2 .0
1 .9
1 .9
1 .7
1 .6
1 .4
1 .3
1 .3
1 .4
1 .6
1 .8
2 .0
2 .2
2 .4
2 .5
2 .6
2 .6
2 .6
2 .6

1 .8
1 .9
1 .5
2 .3
2 .6

1 .7
1 .6
1 .7
2 .0
2 .0
1 .8
2 .1
2 .2
2 .2
2 .2
1 .3
0 .6
-0 .1
1 .5
2 .3
1 .5
1 .8
2 .9
3 .0
2 .8
2 .7
2 .3
2 .5

1 .9
1 .8
1 .1
2 .4
2 .5

0 .4
0 .3
0 .2
0 .4
0 .2
0 .0
0 .2
0 .1
0 .0
-0 .1
-0 .8
-1 .3
-1 .7
-0 .3
0 .1
-0 .7
-0 .4
0 .6
0 .7
0 .6
0 .6
0 .2
0 .4

0 .2
-0 .3
-0 .8
0 .2
0 .4

0 .5
0 .5
0 .5
0 .6
0 .6
0 .6
0 .7
0 .8
1 .0
0 .9
0 .6
0 .3
-0 .1
0 .1
0 .2
0 .3
0 .2
0 .3
0 .4
0 .4
0 .3
0 .3
0 .4

P erio d  A v era g es

0 .7
0 .3
0 .2
0 .3
0 .4

0 .7
0 .8
0 .9
1 .1
1 .1
1 .2
1 .2
1 .2
1 .3
1 .3
1 .4
1 .5
1 .7
1 .8
1 .9
1 .9
1 .9
1 .9
1 .9
1 .8
1 .8
1 .7
1 .7

1 .1
1 .8
1 .7
1 .9
1 .7

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
0 .4
0 .3
0 .2
0 .2
0 .0
0 .0
0 .3
0 .4
0 .6
0 .7
0 .5
0 .3
0 .4
0 .5
0 .5
0 .2
0 .2
0 .3
0 .5
0 .3
0 .4
0 .4
0 .4

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
8 1 .0
8 1 .4
8 1 .6
8 1 .8
8 1 .9
8 1 .9
8 1 .9
8 1 .7
8 1 .5
8 1 .1
8 0 .6
8 0 .1
7 9 .6
7 9 .1
7 8 .6
7 8 .2
7 7 .9
7 7 .6
7 7 .4
7 7 .3
7 7 .1
7 7 .0
7 6 .9

0 .3
0 .4
0 .4
0 .3
0 .4

8 1 .6
7 8 .6
7 9 .6
7 7 .7
7 7 .0

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

2 .2
2 .5
2 .7
2 .5
2 .4
2 .5
2 .4
2 .4
2 .7
3 .1
4 .1
5 .7
7 .9
8 .3
8 .0
8 .6
8 .9
8 .0
7 .2
6 .5
5 .8
5 .7
5 .4

2 .5
7 .3
6 .8
7 .8
5 .6

1 5 .7
1 5 .6
1 5 .7
1 6 .5
1 7 .4
1 7 .2
1 8 .2
1 9 .0
2 0 .8
2 0 .4
1 8 .4
1 6 .2
1 3 .8
1 4 .4
1 5 .4
1 5 .9
1 5 .5
1 6 .3
1 7 .3
1 7 .7
1 7 .5
1 7 .4
1 7 .7

1 7 .6
1 6 .1
1 5 .6
1 6 .5
1 7 .5

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

62

GRAPH A1.14 : SWEDEN OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

5%
4%
3%
2%
1%
0%
-1%
-2%
-3%

Output gap

4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour
capital

TFP

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

5%

4%

3%

2%

1%

0%

-1%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

84%
83%
82%
81%
80%
79%
78%
77%
76%

0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

63

TABLE A1.15 : UNITED KINGDOM OUTPUT GAP AND DETERMINANTS

O u tp u t G a p s (%  o f 
P o te n tia l O u tp u t)

P o ten tia l G ro w th  
(a n n u a l %  ch a n g e )

C on trib u tio n s to  P o ten tia l 
G ro w th *

D eterm in a n ts o f L a b o u r P o te n tia l a n d  
C a p ita l A ccu m u la tion

H P  F ilte r

P F  m eth o d

H P  T ren d  
G ro w th

P F  P o ten tia l 
G ro w th

L a b o u r 
C o n tr ib u tio n

C a p ita l 
A ccu m u la tio n  
C o n trib u tio n

T F P  
C o n tr ib u tio n

1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3

P erio d s

1 9 8 1 -1 9 9 0
1 9 9 1 -2 0 0 0
1 9 9 1 -1 9 9 5
1 9 9 6 -2 0 0 0
2 0 0 1 -2 0 0 3

-3 .9
-3 .9
-2 .5
-2 .3
-1 .2
0 .1
2 .0
4 .6
4 .3
2 .7
-1 .0
-3 .0
-2 .9
-0 .8
-0 .4
-0 .4
0 .4
0 .8
0 .3
0 .8
0 .5
-0 .1
0 .4

0 .0
-0 .6
-1 .7
0 .4
0 .3

-3 .6
-3 .3
-2 .1
-2 .1
-0 .9
0 .4
2 .3
4 .6
3 .9
2 .1
-1 .4
-3 .1
-2 .6
-0 .3
0 .1
0 .3
1 .1
1 .2
0 .4
0 .4
-0 .1
-0 .9
-0 .7

0 .1
-0 .4
-1 .5
0 .7
-0 .6

1 .8
1 .9
2 .1
2 .3
2 .5
2 .6
2 .6
2 .6
2 .5
2 .4
2 .3
2 .3
2 .4
2 .4
2 .5
2 .6
2 .6
2 .6
2 .6
2 .6
2 .5
2 .5
2 .5

2 .3
2 .5
2 .4
2 .6
2 .5

1 .0
1 .7
2 .3
2 .5
2 .4
2 .6
2 .6
2 .8
2 .8
2 .6
2 .1
2 .0
1 .9
2 .3
2 .5
2 .4
2 .7
2 .9
2 .9
3 .0
2 .8
2 .7
2 .8

2 .3
2 .5
2 .2
2 .8
2 .8

-0 .6
-0 .1
0 .4
0 .4
0 .2
0 .4
0 .4
0 .5
0 .5
0 .4
0 .2
0 .2
0 .2
0 .4
0 .5
0 .4
0 .6
0 .6
0 .7
0 .8
0 .6
0 .6
0 .6

0 .3
0 .5
0 .3
0 .6
0 .6

0 .3
0 .4
0 .4
0 .5
0 .5
0 .5
0 .6
0 .9
1 .0
0 .9
0 .6
0 .5
0 .3
0 .4
0 .5
0 .6
0 .7
0 .9
0 .8
0 .9
0 .8
0 .8
0 .9

P erio d  A v era g es

0 .6
0 .6
0 .5
0 .8
0 .8

1 .3
1 .4
1 .5
1 .6
1 .6
1 .6
1 .5
1 .4
1 .4
1 .3
1 .3
1 .3
1 .4
1 .4
1 .4
1 .4
1 .4
1 .4
1 .3
1 .3
1 .3
1 .3
1 .4

1 .5
1 .4
1 .4
1 .4
1 .3

G ro w th  of 
W o rkin g  A g e 
P op u lation  
(a n n u a l %  
ch a n g e)
0 .6
0 .6
0 .8
0 .9
0 .3
0 .3
0 .3
0 .2
0 .1
0 .2
0 .1
0 .1
0 .1
0 .4
0 .4
0 .5
0 .4
0 .5
0 .7
0 .8
0 .5
0 .5
0 .5

T ren d  
P articip a tion  
R ate (%  o f 
W orkin g  A g e 
P op u la tion )
7 3 .3
7 3 .3
7 3 .5
7 3 .6
7 3 .8
7 4 .0
7 4 .3
7 4 .5
7 4 .7
7 4 .8
7 4 .9
7 4 .9
7 4 .9
7 4 .8
7 4 .8
7 4 .7
7 4 .7
7 4 .6
7 4 .6
7 4 .6
7 4 .6
7 4 .6
7 4 .6

0 .4
0 .4
0 .2
0 .6
0 .5

7 4 .0
7 4 .8
7 4 .9
7 4 .7
7 4 .6

N A IR U        
(%  o f L a b ou r 
F o rce)

In vestm en t 
R atio  (%  of 
P o ten tia l 
O u tp u t)

8 .5
9 .2
9 .5
9 .9
1 0 .1
1 0 .1
1 0 .0
9 .7
9 .4
9 .2
9 .1
8 .9
8 .7
8 .4
8 .0
7 .9
7 .4
6 .9
6 .5
6 .0
5 .6
5 .3
4 .9

9 .6
7 .8
8 .6
6 .9
5 .3

1 3 .8
1 4 .4
1 4 .8
1 5 .7
1 6 .0
1 5 .9
1 6 .9
1 8 .9
1 9 .5
1 8 .5
1 6 .6
1 6 .1
1 5 .9
1 6 .3
1 6 .3
1 6 .7
1 7 .4
1 9 .2
1 8 .8
1 9 .0
1 8 .5
1 8 .4
1 8 .5

1 6 .4
1 7 .2
1 6 .2
1 8 .2
1 8 .5

*  : L a b o u r a n d  C a p ita l co n trib u tio n s a re  la b o u r a n d  c a p ita l g ro w th  ra tes a d ju sted  fo r th e ir resp e ctive  fa cto r sh a res. L a b o u r, C a p ita l a n d  T F P  c o n trib u tio n s su m  u p  to  P o te n tia l 
G ro w th  : a n y a p p a ren t d iscrep a n cie s a re d u e to  ro u n d in g .

64

GRAPH A1.15 : UNITED KINGDOM OUTPUT GAP AND DETERMINANTS

Output Growth

actual

potential

6%
5%
4%
3%
2%
1%
0%
-1%
-2%

Output gap

6%

4%

2%

0%

-2%

-4%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Contributions to Potential Output

labour

capital

TFP

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

1981

1985

1989

1993

1997

2001

Investment to Potential GDP (ratio)

30%

25%

20%

15%

10%

TFP Growth

actual

potential (HP filtered)

5%

4%

3%

2%

1%

0%

-1%

-2%

1980

1985

1990

1995

2000

Unemployment Rate

Actual unemployment rate

Nairu

12%

10%

8%

6%

4%

2%

0%

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

Participation Rate

actual

smoothed

77%

76%

75%

74%

73%

72%

71%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Population of Working Age

growth

1980

1985

1990

1995

2000

1980

1985

1990

1995

2000

65

66

ANNEX 2 : COMPARATIVE TABLES AND GRAPHS
FOR EU15, THE EURO ZONE AND THE US 

67

TABLE A2.1 : POTENTIAL GROWTH AND POTENTIAL GROWTH PER CAPITA

Potential Growth (%)
Euro Zone
2.2
2.0
2.9
2.1
2.5
2.5

EU
2.0
2.1
2.8
2.2
2.6
2.6

1981
1985
1990
1995
2000
2003

Potential Growth per capita (%)
Euro Zone
1.8
1.8
2.1
1.8
2.1
2.2

US
1.9
2.3
1.6
1.8
2.4
2.2

EU
US
1.7
3.0
1.9
3.2
2.1
2.7
1.9
3.0
2.2
3.6
3.0
2.3
Period averages
2.0
2.9
1.9
3.1
1.7
2.8
2.1
3.5
2.2
3.0

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

2.3
2.3
2.2
2.3
2.5

2.3
2.2
2.2
2.2
2.5

Potential Growth (%)

4.0 %
3.5 %
3.0 %
2.5 %
2.0 %
1.5 %
1.0 %
0.5 %
0.0 %

1991-1995

1996-2000

2001-2003

EU

Euro Zone

US

Potential Growth per capita (%)

2.5 %

2.0 %

1.5 %

1.0 %

0.5 %

0.0 %

1991-1995

1996-2000

2001-2003

EU Euro Zone US

2.0
1.9
1.8
2.0
2.1

2.0
1.9
1.4
2.3
2.0

68

TABLE A2.2 : DECOMPOSITION OF POTENTIAL GROWTH INTO ITS LABOUR, CAPITAL AND TFP COMPONENTS

Potential Growth (%)

EU
2.0
2.1
2.8
2.2
2.6
2.6

2.3
2.3
2.2
2.3
2.5

Euro Zone
2.2
2.0
2.9
2.1
2.5
2.5

2.3
2.2
2.2
2.2
2.5

US
3.0
3.2
2.7
3.0
3.6
3.0

2.9
3.1
2.8
3.5
3.0

1981
1985
1990
1995
2000
2003

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

Labour Contribution to Potential 
Growth *
Euro Zone
0.2
0.2
0.6
0.4
0.8
0.8

EU
0.1
0.2
0.6
0.4
0.8
0.7

Capital Contribution to Potential 
Growth*
Euro Zone
1.0
0.7
1.0
0.7
0.8
0.7

USA
0.9
1.0
0.8
0.9
1.3
1.1

TFP Contribution to Potential 
Growth
Euro Zone
1.0
1.1
1.2
1.0
0.9
1.0

USA
0.7
1.0
1.1
1.4
1.5
1.4

EU
1.0
1.2
1.2
1.1
1.0
1.1

0.3
0.4
0.3
0.6
0.8

0.3
0.5
0.4
0.6
0.8

0.8
0.8
0.8
0.7
0.7

0.9
1.0
0.7
1.2
1.1

1.2
1.1
1.1
1.0
1.0

1.1
1.0
1.1
0.9
0.9

1.0
1.4
1.2
1.5
1.5

EU
US
0.9
1.4
0.7
1.1
1.0
0.8
0.7
0.8
0.8
0.7
0.7
0.5
Period averages
1.1
0.8
0.7
0.8
0.7
0.8
0.7
0.8
0.7
0.5

* i.e. Labour and Capital Growth Rates adjusted for their respective factor shares

Potential Growth = Labour Component + Capital Accumulation Component + TFP Component

1991-1995

1996 -2000

2001 - 2003

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

TFP Component

Capital
Component

Labour
Component

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

TFP Component

Capital
Component

Labour
Component

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

EU

Euro Zone

US

EU

Euro Zone

US

EU

Euro Zone

US

TFP Component

Capital
Component

Labour
Component

69

TABLE A2.3 : POTENTIAL GROWTH, POTENTIAL EMPLOYMENT AND PRODUCTIVITY PER PERSON EMPLOYED

Potential Growth (%)

Growth rate of Potential 
Employment (annual % change)

1981
1985
1990
1995
2000
2003

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

EU
2.0
2.1
2.8
2.2
2.6
2.6

2.3
2.3
2.2
2.3
2.5

Euro Zone
2.2
2.0
2.9
2.1
2.5
2.5

2.3
2.2
2.2
2.2
2.5

US
3.0
3.2
2.7
3.0
3.6
3.0

2.9
3.1
2.8
3.5
3.0

EU
0.1
0.3
0.9
0.6
1.2
1.1

0.5
0.7
0.5
0.9
1.2

Euro Zone
0.3
0.2
1.0
0.6
1.2
1.2
Period Averages
0.5
0.7
0.6
0.9
1.2

US
2.1
1.8
1.2
1.2
1.1
0.7

1.7
1.2
1.2
1.2
0.7

Growth rate of Labour 
Productivity (Output per Person 
Employed)
Euro Zone
1.9
1.7
1.9
1.5
1.3
1.3

EU
1.9
1.8
1.9
1.5
1.4
1.4

US
0.8
1.4
1.5
1.8
2.5
2.3

1.8
1.6
1.7
1.4
1.4

1.8
1.5
1.7
1.3
1.2

1.3
1.9
1.5
2.3
2.3

                   Growth rate of Labour Productivity = Potential Growth - Growth Rate of Potential Employment. Any apparent discrepancies are due to rounding.

1991-1995

1996 -2000

2001 - 2003

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Growth rate of
Labour
Productivity

Growth rate of
Potential
Employment

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Growth rate of
Labour
Productivity

Growth rate of
Potential
Employment

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

EU

Euro Zone

US

EU

Euro Zone

US

EU

Euro Zone

US

Growth rate of
Labour
Productivity

Growth rate of
Potential
Employment

70

ANNEX 3 : HOURS WORKED: ADJUSTMENT OF POTENTIAL GROWTH
AND ITS COMPONENTS FOR HOURS WORKED PER PERSON
EMPLOYED (EU15, EURO ZONE AND THE US)

71

TABLE A3.1 : HOURS WORKED PER PERSON EMPLOYED

Hours worked

EU
1733
1683
1656
1619
1607
1608

Euro Zone
1743
1681
1654
1612
1598
1599

1981
1985
1990
1995
2000
2003 *

Annual % change in Hours 
worked
Euro Zone
-1.1
-0.6
-0.4
-0.3
-0.5
0.0

US
-0.9
0.1
-0.6
0.8
0.4
0.0

EU
US
-1.0
1815
-0.4
1825
-0.5
1819
-0.2
1840
-0.5
1879
1868
0.0
Period averages
-0.6
1815
-0.3
1839
-0.4
1817
-0.1
1860
0.0
1868

1687
1620
1626
1615
1608

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003 *
* : For the US, hours worked in 2002 and 2003 are identical to hours worked in 2001. For the EU, 
the base year is 2000.

1687
1615
1623
1606
1599

-0.6
-0.3
-0.5
-0.2
0.0

-0.1
0.3
0.2
0.4
-0.2

Source : University of Groningen and the Conference Board, GGDC Total Economy
Database, 2002.

Evolution of Hours worked per Person Employed

1900

1800

1700

1600

1500

1981

1984

1987

1990

1993

1996

1999

2002

US

EU

Euro
zone

72

TABLE A3.2 : DECOMPOSITION OF POTENTIAL GROWTH INTO ITS LABOUR (INCL. HOURS WORKED), CAPITAL AND TFP COMPONENTS

Labour Contribution (incl. 
change in Hours worked) to 
Potential Growth *
Euro Zone
-0.4
-0.3
0.3
0.2
0.7
0.7

EU
-0.5
-0.2
0.3
0.3
0.7
0.7

Potential Growth (%) *

Capital Contribution to Potential 
Growth

TFP Contribution to Potential 
Growth *

US
3.0
3.2
2.7
3.1
3.6
3.0

EU
2.0
2.1
2.8
2.2
2.5
2.4

1981
1985
1990
1995
2000
2003

Euro Zone
2.2
2.0
2.9
2.1
2.4
2.3

US
EU
1.2
0.9
1.1
0.7
0.9
1.0
1.0
0.7
0.9
0.8
0.7
0.6
Period averages
1981-1990
1.0
0.8
1991-2000
0.7
1.0
1991-1995
0.7
0.9
1996-2000
0.7
1.0
2001-2003
0.6
0.7
*  Hours  worked  are  HP-filtered  and  then  enter  the  calculation  of  the  potential  labour  input  and  subsequently  that  of  potential  output.    As  a  result  the  Solow  residual  is
adjusted and the potential TFP contribution changes. From 2001 onwards, hours worked are kept to their level of 2000-2001, which explains the differences at the end of the
series with previous tables.

Euro Zone
1.0
0.7
1.0
0.7
0.8
0.7

Euro Zone
1.6
1.6
1.5
1.2
0.9
0.8

EU
1.6
1.6
1.5
1.2
1.0
0.9

US
0.9
1.1
1.1
1.2
1.3
1.2

US
0.9
1.0
0.8
0.9
1.3
1.1

-0.1
0.3
0.1
0.5
0.7

-0.1
0.3
0.1
0.5
0.7

2.3
2.2
2.2
2.2
2.3

2.9
3.1
2.8
3.5
3.0

0.8
0.8
0.8
0.7
0.7

2.3
2.2
2.2
2.3
2.4

1.6
1.2
1.3
1.1
0.9

0.9
1.0
0.7
1.2
1.1

1.0
1.2
1.1
1.3
1.3

1.6
1.1
1.3
1.0
0.8

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1991-1995

TFP Component

Capital
Component

Labour
Component (incl
change in Hours
worked)

EU

Euro Zone

US

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1996 -2000

2001 - 2003

TFP Component

Capital
component

Labour
component (incl
change in Hours
worked)

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

EU

Euro Zone

US

EU

Euro Zone

US

TFP Component

Capital
Component

Labour
Component (incl
change in Hours
worked)

73

TABLE A3.3 : POTENTIAL GROWTH, POTENTIAL EMPLOYMENT CHANGE (INCL. CHANGE IN HOURS WORKED) AND HOURLY PRODUCTIVITY

Potential Growth (%)

Potential Labour Input in Hours 
(Annual % change)

Hourly Labour productivity 
(annual % change)

1981
1985
1990
1995
2000
2003

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

EU
2.0
2.1
2.8
2.2
2.5
2.4

2.3
2.2
2.2
2.3
2.4

Euro Zone
2.2
2.0
2.9
2.1
2.4
2.3

2.3
2.2
2.2
2.2
2.3

US
3.0
3.2
2.7
3.1
3.6
3.0

2.9
3.1
2.8
3.5
3.0

EU
-0.7
-0.3
0.5
0.4
1.1
1.0

-0.1
0.5
0.2
0.7
1.1

Euro Zone
-0.5
-0.4
0.5
0.4
1.0
1.1
Period averages
-0.2
0.5
0.2
0.7
1.1

US
1.8
1.7
1.3
1.5
1.4
1.0

1.6
1.5
1.5
1.5
1.0

EU
2.7
2.4
2.3
1.8
1.4
1.3

2.4
1.8
2.0
1.6
1.3

Euro Zone
2.7
2.4
2.3
1.8
1.4
1.2

2.5
1.8
2.0
1.5
1.2

US
1.1
1.6
1.4
1.6
2.2
2.0

1.4
1.7
1.3
2.0
2.0

1991-1995

1996 -2000

2001 - 2003

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Hourly Labour
productivity
(annual %
change)

Potential Labour
Input in Hours
(annual %
change)

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Hourly Labour
productivity
(annual %
change)

Potential Labour
Input in Hours
(annual %
change)

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

EU

Euro Zone

US

EU

Euro Zone

US

EU

Euro Zone

US

Hourly Labour
productivity
(annual %
change)

Potential Labour
Input in Hours
(annual %
change)

74

TABLE A3.4 : DECOMPOSITION OF POTENTIAL EMPLOYMENT CHANGE (INCL. CHANGES IN HOURS WORKED) INTO ITS DETERMINANTS

Annual % change in Potential 
Labour Input in Hours

Annual % change in Population 
of Working Age

Annual % change in Trend 
Participation Rate

Annual percentage change in (1-
NAIRU)

1981
1985
1990
1995
2000
2003

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

EU
-0.7
-0.3
0.5
0.4
1.1
1.0

-0.1
0.5
0.2
0.7
1.1

Euro Zone
-0.5
-0.4
0.5
0.4
1.0
1.1

-0.2
0.5
0.2
0.7
1.1

US
1.8
1.7
1.3
1.5
1.4
1.0

1.6
1.5
1.5
1.5
1.0

EU
1.1
0.5
0.6
0.3
0.3
0.2

0.7
0.3
0.4
0.3
0.3

Euro Zone
1.3
0.6
0.7
0.2
0.3
0.2

0.8
0.3
0.4
0.2
0.3

US
1.2
1.0
0.7
1.0
1.1
1.0

0.9
1.0
0.9
1.1
0.9

EU
-0.1
0.1
0.2
0.2
0.4
0.4

0.1
0.3
0.2
0.4
0.4

Euro Zone
-0.1
0.0
0.2
0.4
0.5
0.5
Period averages
0.0
0.4
0.3
0.5
0.5

US
0.8
0.7
0.6
0.2
0.0
-0.1

0.7
0.2
0.3
0.1
-0.1

EU
-0.9
-0.3
0.1
0.1
0.4
0.5

-0.3
0.1
-0.1
0.3
0.4

Euro Zone
-0.8
-0.4
0.1
0.1
0.4
0.5

-0.3
0.1
-0.1
0.2
0.4

US
0.2
0.0
-0.1
0.0
0.0
-0.2

0.1
0.0
0.0
0.0
-0.1

Annual % change in (trend) 
Hours Worked per Person 
Employed
Euro Zone
-0.8
-0.7
-0.5
-0.3
-0.2
-0.1

EU
-0.8
-0.6
-0.4
-0.2
-0.1
-0.1

US
-0.3
-0.1
0.1
0.3
0.3
0.2

-0.6
-0.2
-0.3
-0.2
-0.1

-0.6
-0.3
-0.4
-0.2
-0.1

-0.1
0.3
0.2
0.3
0.2

Change in Potential Labour Input = Change in Working Age Population + Change in Participation Rate + Change in (1-NAIRU) + Change in Hours worked.
Any apparent discrepancies are due to rounding.

1991-1995

1996-2000

2001-2003

1.5 %

1.0 %

0.5 %

0.0 %

-0.5 %

EU

Euro Zone

US

Change in Hours
worked

Change in
NAIRU

Change in
Participation
Rate
Change in
Working Age
Population

1.5 %

1.0 %

0.5 %

0.0 %

-0.5 %

EU

Euro Zone

US

Change in Hours
worked

Change in
NAIRU

Change in
Participation
Rate
Change in
Working Age
Population

1.5 %

1.0 %

0.5 %

0.0 %

-0.5 %

EU

Euro Zone

US

Change in Hours
worked

Change in
NAIRU

Change in
Participation
Rate
Change in
Working Age
Population

75

TABLE A3.5 : DECOMPOSITION OF THE GROWTH OF HOURLY LABOUR PRODUCTIVITY INTO CAPITAL DEEPENING AND TFP COMPONENTS

Hourly Labour productivity 
(annual percentage change)

EU
2.7
2.4
2.3
1.8
1.4
1.3

2.4
1.8
2.0
1.6
1.3

Euro Zone
2.7
2.4
2.3
1.8
1.4
1.2

2.5
1.8
2.0
1.5
1.2

US
1.1
1.6
1.4
1.6
2.2
2.0

1.4
1.7
1.3
2.0
2.0

1981
1985
1990
1995
2000
2003

1981-1990
1991-2000
1991-1995
1996-2000
2001-2003

Capital Deepening Component

Other TFP

EU
1.1
0.8
0.8
0.5
0.4
0.4

0.8
0.6
0.7
0.5
0.4

Euro Zone
1.2
0.9
0.8
0.6
0.5
0.4
Period averages
0.9
0.6
0.7
0.5
0.3

US
0.3
0.4
0.3
0.4
0.9
0.8

0.3
0.4
0.2
0.7
0.7

EU
1.6
1.6
1.5
1.2
1.0
0.9

1.6
1.2
1.3
1.1
0.9

Euro Zone
1.6
1.6
1.5
1.2
0.9
0.8

1.5
1.1
1.3
1.0
0.8

US
0.9
1.1
1.0
1.2
1.3
1.2

1.0
1.2
1.1
1.3
1.3

Change in Hourly Labour productivity = Capital Deepening + TFP Change. Any apparent discrepancies are due to rounding

1991-1995

1996 -2000

2001 - 2003

2.5

2.0

1.5

1.0

0.5

0.0

Other TFP

Capital
Deepening
Component

2.5

2.0

1.5

1.0

0.5

0.0

2.5

2.0

1.5

1.0

0.5

0.0

Other TFP

Capital
Deepening
Component

EU

Euro Zone

US

EU

Euro Zone

US

EU

Euro Zone

US

Other TFP

Capital
Deepening
Component

76

ANNEX 4 : CALCULATING MULTIPLIERS FOR INDIVIDUAL MEMBER
STATES  

77

TABLE A4.1 : GROWTH DIFFERENTIAL DUE TO AN INCREASE IN THE GROWTH RATE
OF THE WORKING AGE POPULATION

For an increase of one percentage point in the
growth rate of the Working Age Population,
sustained over the period 2001-2006 …

Growth differential
in 2001

Growth differential
in 2006

US

EU15

EU12

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

+ 0.685 %

+ 0.679 %

+ 0.678 %

+ 0.678 %

+ 0.681 %

+ 0.672 %

+ 0.682 %

+ 0.684 %

+ 0.679 %

+ 0.708 %

+ 0.679 %

+ 0.721 %

+ 0.680 %

+ 0.678 %

+ 0.691 %

+ 0.686 %

+ 0.680 %

+ 0.679 %

+ 0.721 %*

+ 0.752 %

+ 0.752 %

+ 0.758 %

+ 0.764 %

+ 0.741 %

+ 0.752 %

+ 0.759 %

+ 0.750 %

+ 0.775 %

+ 0.749 %

+ 0.894 %

+ 0.757 %

+ 0.748 %

+ 0.797 %

+ 0.740 %

+ 0.748 %

+ 0.753 %

* In the case of the US, the growth differential refers to the year 2003 instead of 2006
since no medium-term extension for the US has been calculated.

78

TABLE A4.2 : GROWTH DIFFERENTIAL DUE TO AN INCREASE IN THE
PARTICIPATION RATE

For an (absolute) increase of one percentage
point in the Participation Rate over the period
2001-2006 …

Growth differential
in 2001

Growth differential
in 2006

US

EU15

EU12

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

+ 0.894 %

+ 0.983 %

+ 1.003 %

+ 1.082 %

+ 0.861 %

+ 0.912 %

+ 1.107 %

+ 1.122 %

+ 0.989 %

+ 1.063 %

+ 1.131 %

+ 1.106 %

+ 0.883 %

+ 0.947 %

+ 0.960 %

+ 0.930 %

+ 0.884 %

+ 0.914 %

+ 0.024 %*

+ 0.014 %

+ 0.013 %

+ 0.017 %

+ 0.019 %

+ 0.012 %

+ 0.016 %

+ 0.014 %

+ 0.013 %

+ 0.006 %

+ 0.012 %

+ 0.020 %

+ 0.007 %

+ 0.016 %

+ 0.019 %

+ 0.012 %

+ 0.018 %

+ 0.018 %

* In the case of the US, the growth differential refers to the year 2003 instead of 2006
since no medium-term extension for the US has been calculated.

79

TABLE A4.3 : GROWTH DIFFERENTIAL DUE TO A DECREASE IN THE NAIRU

For an (absolute) decrease of one percentage
point in the NAIRU over the period 2001-
2006 …

Growth differential
in 2001

Growth differential
in 2006

US

EU15

EU12

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

+ 0.727 %

+ 0.743 %

+ 0.749 %

+ 0.735 %

+ 0.713 %

+ 0.737 %

+ 0.763 %

+ 0.802 %

+ 0.753 %

+ 0.770 %

+ 0.753 %

+ 0.747 %

+ 0.709 %

+ 0.705 %

+ 0.737 %

+ 0.750 %

+ 0.724 %

+ 0.723 %

+ 0.021 %*

+ 0.013 %

+ 0.013 %

+ 0.015 %

+ 0.015 %

+ 0.012 %

+ 0.014 %

+ 0.014 %

+ 0.014 %

+ 0.014 %

+ 0.013 %

+ 0.026 %

+ 0.014 %

+ 0.013 %

+ 0.018 %

+ 0.012 %

+ 0.013 %

+ 0.013 %

* In the case of the US, the growth differential refers to the year 2003 instead of 2006
since no medium-term extension for the US has been calculated.

80

TABLE A4.4 : GROWTH DIFFERENTIAL DUE TO A CHANGE IN THE INVESTMENT
RATIO

For an (absolute) increase of one percentage
point in the investment ratio (e.g. from 20%
to 21% of potential output), sustained over
the 2001-2006 period

Growth differential
in 2001

Growth differential
in 2006

US

EU15

EU12

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

+ 0.152 %

+ 0.119 %

+ 0.116 %

+ 0.128 %

+ 0.128 %

+ 0.102 %

+ 0.083 %

+ 0.125 %

+ 0.131 %

+ 0.166 %

+ 0.114 %

+ 0.278 %

+ 0.122 %

+ 0.111 %

+ 0.148 %

+ 0.136 %

+ 0.141 %

+ 0.133 %

+ 0.134 %*

+ 0.095 %

+ 0.092 %

+ 0.102 %

+ 0.095 %

+ 0.084 %

+ 0.062 %

+ 0.087 %

+ 0.105 %

+ 0.145 %

+ 0.091 %

+ 0.147 %

+ 0.097 %

+ 0.083 %

+ 0.094 %

+ 0.121 %

+ 0.119 %

+ 0.106 %

* In the case of the US, the growth differential refers to the year 2003 instead of 2006
since no medium-term extension for the US has been calculated.

81

TABLE A4.5 : GROWTH DIFFERENTIAL DUE TO AN INCREASE IN TFP GROWTH

For an increase of one percentage point in the
growth rate of TFP, sustained over the 2001-
2006 period

Growth differential
in 2001

Growth differential
in 2006

US

EU15

EU12

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

+ 1.069 %

+ 1.056 %

+ 1.055 %

+ 1.055 %

+ 1.055 %

+ 1.057 %

+ 1.046 %

+ 1.059 %

+ 1.070 %

+ 1.057 %

+ 1.120 %

+ 1.052 %

+ 1.126 %

+ 1.060 %

+ 1.051 %

+ 1.084 %

+ 1.064 %

+ 1.057 %

+ 1.129 %*

+ 1.168 %

+ 1.167 %

+ 1.182 %

+ 1.187 %

+ 1.146 %

+ 1.166 %

+ 1.178 %

+ 1.170 %

+ 1.214 %

+ 1.158 %

+ 1.398 %

+ 1.181 %

+ 1.157 %

+ 1.240 %

+ 1.147 %

+ 1.166 %

+ 1.173 %

* In the case of the US, the growth differential refers to the year 2003 instead of 2006
since no medium-term extension for the US has been calculated.

82