The macroeconomics of the labor market: three fundamental views |
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Authors: | Marika Karanassou Hector Sala Dennis J Snower |
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Institution: | (1) Department of Economics, Queen Mary, University of London, Mile End Road, London, E1 4NS, UK;(2) Departament d’Economia Aplicada, Universitat Autònoma de Barcelona, 08193 Bellaterra, Spain;(3) Iza, Bonn, Germany;(4) Kiel Institute for the World Economy, Dusternbrooker Weg 120, 24105 Kiel, Germany;(5) Christian-Albrechts-University of Kiel, Kiel, Germany |
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Abstract: | We distinguish and assess three fundamental views of the labor market regarding the movements in unemployment: (1) the frictionless
equilibrium view; (2) the chain reaction theory, or prolonged adjustment view; and (3) the hysteresis view. While the frictionless
view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the short-run
fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions
in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment
view can overcome these problems since it implies that the short, medium, and long-runs are interrelated, merging with one
another along an intertemporal continuum.
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Keywords: | Unemployment Interactive labor market dynamics Interplay of lags and shocks Frictional growth Growth drivers |
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