For example, on the third slide you can see that in 2013 the European Commission estimated that structural unemployment for 5 2/9  BIS central bankers' speeches  the euro area as a whole was likely to increase from pre-crisis levels of around 8.5% to 11.6%.5 Today, Commission staff believe that structural unemployment in the euro area is closer to 9% – compared with an actual unemployment rate of 9.5% in March 2017. In other words, without the significant downward revisions of recent years, we would currently face a negative unemployment gap in the euro area. And even according to the Commission’s latest estimates, policy-relevant labour market slack would have vanished, by and large. You can see what I’m getting at. If structural unemployment had indeed risen during the crisis to the extent suggested, then we would have expected inflationary pressures to emerge much more rapidly, since the unemployment gap would have been closing faster than otherwise. But this is not what we see in the euro area – or, in fact, in many other economies. Despite a rapid fall in the unemployment rate, wages have remained stubbornly low. Annual growth in compensation per employee hovered around 1.2% since mid-2014 and only increased to 1.5% at the end of last year – substantially below its historical average of 2.1%.6 And measures of core inflation – in its simplest form headline inflation excluding volatile items such as food and energy – have also remained at depressed levels of below 1% for most of the past three years.
This is confirmed by Phillips curve estimates. As you can see from the right-hand side chart on slide 3, ECB in-house estimates using a variety of slack and inflation expectations measures suggest that core inflation today is well below what historical regularities would suggest. Of course, a number of factors – such as changes in the slope, weak productivity growth or second-round effects of past low inflation – might be at work here. But in the current context this is unlikely to be the whole story. For one, there is considerable uncertainty around the slope of the Phillips curve. As we heard this morning, some estimates show that the curve has flattened in recent years. ECB research, by contrast, found evidence that inflation has become more responsive to slack lately, but with notable heterogeneity across euro area Member States.7 Blanchard, Cerutti and Summers have not found much change at all during the crisis.8 Second, our Phillips curve estimates show that even once we control for past low inflation and weak productivity growth, there is still a considerable part that cannot be explained by the model. These analyses therefore do offer one useful conclusion: that slack may be larger and that structural unemployment may perhaps not have risen by as much as some estimates suggest. This also means that policymakers should be careful in attaching too much weight to notoriously unreliable and hard-to-estimate measures such as the NAIRU.