How much has labour taxation contributed to European structural unemployment?

We analyse the effect of labour taxes on euro area unemployment. Making use of the Blanchard and Katz (1999) [Wage dynamics: reconciling theory and evidence. American Economic Review 89(2), 69-74.] NAIRU model, we represent structural unemployment as that made up of two elements: an observed part related to labour taxes plus a non-stationary unobservable component related to the reservation wage and to the wage mark-up. Contrary to empirical estimates available so far, this modelling explicitly acknowledges the existence of non-measurable factors responsible for the unemployment non-stationarity. For the period 1970-2004, we obtain a tax effect that lies in the middle of the estimates that can be found in the literature. This study gives support to the view that lowering labour taxes can help to reduce unemployment in continental Europe.