aCardiff Business School, Cardiff University, Aberconway Building, Cardiff, Wales, CF10 3EU, UK;bDepartment of Economics, Univeristy of Pretoria, Pretoria, 0002, South Africa
Abstract:
This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment for the UK and the US interwar period. The theory here sees the natural rate and the associated path of unemployment as a reaction to mainly demand shocks and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.