PHILLIPS CURVES AND UNEMPLOYMENT DYNAMICS: A CRITIQUE AND A HOLISTIC PERSPECTIVE

Abstract.  The conventional wisdom that inflation and unemployment are unrelated in the long run implies the compartmentalization of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve, we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation–unemployment trade-off in the long run. We thus argue that a holistic framework, such as the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions.     

The Economy: Returning to Balance?

In October 1981 in "An Economy Out of Balance" we examined the state of the economy following the severe shocks of 1979 and 1980. We warned that adjustments in some markets, particularly for goods and labour, might be "painfully slow", In this Viewpoint we bring that study up to date. We argue that the recent fall in the exchange rate has helped to correct some of those imbalances and that there should now be the basis for a recovery of output and a check to the rise in unemployment.     

The Costs and Benefits of Cutting Inflation

In recent speeches Treasury Ministers have coined a new slogan. They argue that inflation is not an alternative to high unemployment but a fundamental cause of it. They use this slogan to attack those who suggest that thefight against inflation should be slackened - at least briefly - in order to reduce unemployment. In this Economic e iewpoint we examine the arguments about the relation between inflation and unemployment. We suggest that although inflation may be a cause of unemployment in the long term there is an inescapable short-term choice to be made between reducing unemployment and reducing inflation. We explain why this choice arises and also discuss the longer-term effects of counter-inflationary policies. Finally we examine the record of this Government's policies so far.     

The ‘recession-push’ hypothesis reconsidered

The relationship between unemployment and self-employment has been studied extensively. Due to its complex, multifaceted nature, various scholars have found a large array of different results, so that the exact nature of the relation is still not clear. An important element of the relation is captured by the recession-push hypothesis which states that in times of high unemployment individuals are pushed into self-employment for lack of alternative sources of income such as paid employment. We make two contributions to this literature. First, we argue that official unemployment rates may not capture the ??true?? rate of unemployment as it does not include ??hidden?? unemployed who are out of the labour force. Therefore, we propose a new method where the ??recession-push?? effect relates not only to the (official) unemployed but also to the inactive population. Second, we argue that the magnitude of the recession-push effect is non-linear in the business cycle, i.e. the effect is disproportionally stronger when economic circumstances are worse. We provide empirical support for our hypotheses by estimating an econometric model on Spanish data.     

Labor quality,natural unemployment,and US inflation

The recent combination of low inflation and low unemployment has led some to question whether the short-run, Phillips curve trade-off is dead. We argue that the improved trade-off has resulted, in part, from improved labor quality in the form of increased average years of work experience and education, and use these variables to calculate new estimates of the natural unemployment rate. Based on evidence from inflation equations, we find strong support for a time-varying natural unemployment rate, and find that our measure based on labor quality outperforms other leading measures of natural unemployment.     

Credit constraints and the persistence of unemployment

In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment.     

Heterogeneity and Time

A bstract .   Although heterogeneity and time are central aspects of economic activity, it was predominantly the Austrian School of economics that emphasized these two aspects. In this paper we argue that the explicit consideration of heterogeneity and time is of increasing importance due to the increasing environmental and resource problems faced by humankind today. It is shown that neo-Austrian capital theory, which revived Austrian ideas employing a formal approach in the 1970s, is not only well suited to address issues of structural change and of accompanying unemployment induced by technical progress but also can be employed for an encompassing ecological-economic analysis demanded by ecological economics. However, complexity, uncertainty, and real ignorance limit the applicability of formal economic analysis. Therefore, we conclude that economic analysis has to be supplemented by considerations of political philosophy.     

global unemployment

What are the lessons of American unemployment in the Great Depression? Richard Vedder and Lowell Gallaway, of Ohio University, argue that the cause of American pre-war unemployment was government inspired increases in real wages.     

Keynes On Markets

A bstract . The heart of modern economics is the study of "the market," eventually ensuing in the General Equilibrium model. J. M. Keynes ignored, this line of inquiry but from 1907, when he was at the India Office, to the 1940s, when he made proposals for the post-war reconstruction of the financial system , he often addressed himself to the functioning of markets. He is critical of many markets for promoting instability , and especially for embodying low values (greed, fears). It is suggested that Keynes' views on markets were shaped by his personal experiences as an investor; by his realistic, non-theoretical approach; by his anti-Benthamite values and by his sensitivity to the unemployment and "chaos" they often caused.     

Still feeling employable with growing age? Exploring the moderating effects of developmental HR practices and country-level unemployment rates in the age – employability relationship

Abstract

A compelling issue for organizations and societies at large is to ensure external employability of the workforce across workers’ entire work-life span. Using the frameworks of age norms, stereotyping and age meta-stereotypes, we investigate whether (a) age is negatively related to perceived external employability; and (b) the age-employability link is moderated by HR developmental practices (HRDPs) and unemployment rate. We argue that being aware of stereotypes and age norms in organizations, and holding also meta-stereotypes about their group, older workers perceive themselves as less externally employable. However, the context –HRDPs that one has experienced, and the country unemployment rate – would act as buffers. Using data from a large-scale survey from over 9000 individuals in 30 institutionally diverse countries, we found that the negative relationship between age and perceived external employability was significant across all countries. In addition, at the individual level, we found that HRDPs acted as a buffer for this negative relationship, such that the effect was less pronounced for individuals who have experienced more HRDPs during their working life. At the country level, the hypothesized moderating effect of unemployment rate was not observed. Limitations, future research directions, as well as practical implications of the study are discussed.     

Exchange Rate Variability and Labor Market Performance in the Visegrád Countries

According to the traditional optimum currency area approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate. This paper takes a different approach and highlights the fact that high exchange rate volatility may as well signal high costs for labor markets. Based on the paper by Belke (2003), the impact of exchange rate volatility on labor markets in the four Visegrád Economies (Czech Republic, Hungary, Poland, and the Slovak Republic) is analyzed, finding that volatility vis-à-vis the euro significantly increases unemployment. Hence, the elimination of exchange rate volatility could be considered as a substitute for a removal of employment protection legislation.     

Is the European Economy Turning the Corner?

The European economy looks bleak. Unemployment is hight. Growth over the recovery has been weak. And Germany – the powerhouse – is facing major economic difficulties. However, Jenni Greenslade and Andrew Sentance argue in this article that a turning point is in sight. Some of the depressing influences on recent European economic performance are fading. And there is plenty of capacity for growth without inflationary pressures emerging. It is time to show some cautious optimism about European economic prospects, though the problem of high unemployment is likely to take many years to erode.     

HOW EFFECTIVE ARE UNEMPLOYMENT BENEFIT SANCTIONS? LOOKING BEYOND UNEMPLOYMENT EXIT

This paper provides a comprehensive evaluation of the effects of benefit sanctions on post‐unemployment outcomes such as post‐unemployment employment stability and earnings. We use rich register data which allow us to distinguish between a warning that a benefit reduction may take place in the near future and the actual withdrawal of unemployment benefits. Adopting a multivariate mixed proportional hazard approach to address selectivity, we find that warnings do not affect subsequent employment stability but do reduce post‐unemployment earnings. Actual benefit reductions lower the quality of post‐unemployment jobs both in terms of job duration as well as in terms of earnings. Copyright © 2012 John Wiley & Sons, Ltd.     

Growth,unemployment and heterogeneity

The paper analyzes unemployment in a medium-run growth model, where aggregate demand and supply interact, using a top-down approach. The aim of the essay is the study of a nonlinear system where both aggregate demand and supply are endogenous and generate bounded unemployment, followed by a methodological effort direct to identify possible lines of convergence with the agent based models (ABM) approach. This is a by-product of the presence of heterogeneity in the model. Heterogeneity acts through two different channels and operates among class of agents: it comes into the aggregate consumption function where households are assumed employed or unemployed; it changes the learning process of pessimists and optimists. The analysis is carried on through simulations. The resulting system is fairly stable to changes in main structural parameters. On one hand, autonomous demand drives the dynamics of the system, while heterogeneity in the consumption function, due to the presence of unemployment, strengthens the links with supply aspects. On the other hand, both the rate of growth of labor productivity and labor supply are endogenous. Two major results are obtained. First, unemployment allows the so called Harrodian reconciliation between aggregate demand and supply. Second, unemployment remains bounded meaning that the interaction between aggregate demand and supply thwarts instability. These results are in keeping with those obtained by means of a bottom-up approach, typical of ABM. Possible explanations and implications of this convergence are put forward and open the venue to further deepening of complementarities among the two modeling strategies.

     

Unemployment shocks and material deprivation in the European Union: A synthetic control approach

This paper analyzes how material deprivation responds to drastic changes in unemployment levels. We explore unemployment shocks registered in some European Union countries during the so-called Great Recession. To do so, we apply the synthetic control methodology, which has been rarely used in the field of distributive analyses. We use this approach to identify the impact of unemployment shocks on material deprivation and conduct different sensitivity analyses to test the results. We find that contrary to the traditional assumption of the low sensitivity of material deprivation measures to changes in the economic cycle, unemployment shocks have a significant and rapid impact on material deprivation. This conclusion holds even when extending the period of analysis, changing the indicator of material deprivation, or modifying the definition of unemployment shock.     

Incidence and duration of unemployment spells: Implications for the male–female wage differentials

We demonstrate in this paper that the incidence of unemployment and duration of unemployment spells affect the male–female gender wage differential. The results indicate that after controlling for sample selectivity bias in the wage equation, the incidence of unemployment and duration of unemployment spells account for about 14.2% and 39.6%, respectively, of the wage differential that exists between males and females. We observed that while the duration of unemployment accounts for a substantial portion of the wage differential in both the service (48.8%) and the manufacturing (17.0%) sectors, the impacts of the incidence of unemployment and duration of unemployment spells variables on the wage differential are rather small in the service (0.07%) and the manufacturing (1.6%) sectors. Also, high incidence of unemployments is associated with low wages for males and females in all samples. In contrast, longer durations of unemployment spells tend to increase males’ wages and decrease females’ wages in the full and service sector samples. At the macro level, the results seem to suggest that promotion of gender wage equality should be associated with policies that will minimize the female's incidence of unemployment and duration of unemployment spells.     

Endogenous censoring in the mixed proportional hazard model with an application to optimal unemployment insurance

We examine the sensitivity of estimates of the MPH model with respect to assumptions on the censoring mechanism in the context of an economic model of optimal unemployment insurance. We assume a parametric model for the duration of interest and leave the distribution of censoring unrestricted, allowing it to be correlated with observed and unobserved characteristics. We provide a practical characterization of the identified set with moment inequalities and suggest methods for estimating this set. We apply this approach to estimate the elasticity of unemployment exit rate with respect to unemployment benefit. Finally, we investigate welfare consequences of our estimates.     

Regional Efficiency Wages: Are They a Source of Real Earnings Differentials?

This paper investigates the role of spatial efficiency wage premiums as a partial explanation for both inter-industry and geographic wage differentials. The empirical approach is based on an analysis of panel data for six select manufacturing industries operating within specific (U.S.) states. Besides testing for the existence of a regional "wage curve," this research adds to the evidence on traditional determinants of spatial wage differentials. An explicit treatment of regional cost-of-living conditions is unique to the analysis; also, industry wage structures are accounted for in explaining regional wage differences. The findings here contribute to an initial body of evidence on regional efficiency wages. The empirical evidence indicates that the relationship between regional wages (nominal or real) and the local unemployment rate is much more complex than implied by the wage curve.     

A ‘lost decade’ for pay may be a taste of things to come

• ? The failure of pay growth to respond to falling unemployment is less of a puzzle when allowance is made for structural changes in the jobs market. But the same developments make it hard to see where a pay revival will come from.
• ? In real terms, the average weekly wage in the UK is below the level of 10 years ago, an unprecedentedly poor performance. This is despite joblessness dropping to a 42‐year low and employment at a record high.
• ? The responsiveness of pay to falling unemployment has dwindled. A shift towards less secure forms of employment, the tightening up of eligibility for benefits and the consequences of globalisation have all made workers more compliant and less willing and able to push for higher wages.
• ? The result has been a decline in the ‘equilibrium’ rate of unemployment. The Bank of England currently judges this rate to be around 4.5%. But that earnings growth is so subdued despite unemployment being in line the Bank's estimate suggests that the sustainable rate of joblessness may well be much lower.
• ? With unemployment forecast to plateau at current levels, the odds of a revival in pay growth look slim, despite possible upsides from strong corporate profitability and rises in the National Living Wage. This would not be a new development – a secular decline in earnings growth has been apparent over the last 30 years in both nominal and real terms, with pay growth in successive periods of economic expansion failing to return to pre‐recession norms.
• ? This suggests that a serious revival in pay growth is unlikely to happen without the economy operating at significantly higher pressure and with a substantially lower unemployment rate. But this would require a recognition of, and a more accommodative policy response to, the historically weak economic expansion since the financial crisis. Neither seems likely.

     

A Bayesian Semiparametric Competing Risk Model with Unobserved Heterogeneity

This paper generalizes existing econometric models for censored competing risks by introducing a new flexible specification based on a piecewise linear baseline hazard, time‐varying regressors, and unobserved individual heterogeneity distributed as an infinite mixture of generalized inverse Gaussian (GIG) densities, nesting the gamma kernel as a special case. A common correlated latent time effect induces dependence among risks. Our model is based on underlying latent exit decisions in continuous time while only a time interval containing the exit time is observed, as is common in economic data. We do not make the simplifying assumption of discretizing exit decisions—our competing risk model setup allows for latent exit times of different risk types to be realized within the same time period. In this setting, we derive a tractable likelihood based on scaled GIG Laplace transforms and their higher‐order derivatives. We apply our approach to analyzing the determinants of unemployment duration with exits to jobs in the same industry or a different industry among unemployment insurance recipients on nationally representative individual‐level survey data from the US Department of Labor. Our approach allows us to conduct a counterfactual policy experiment by changing the replacement rate: we find that the impact of its change on the probability of exit from unemployment is inelastic. Copyright © 2014 John Wiley & Sons, Ltd.