Special Policy Forum on Unemployment: Editorial Note

The papers for this Policy Forum were presented at a Melbourne Institute Conference in November. Comments by discussants are included.     

The NAIRU and Classical Unemployment in the OECD Countries

Using panel data for the OECD countries over the period 1960–93 this paper estimates the NAIRU, tests the restrictions implied by the NAIRU and estimates the extent to which the NAIRU is able to explain the low frequency movements in unemployment. The results indicate that the long-run restrictions imposed on the NAIRU are not satisfied for many countries and that the NAIRU is unable to account for the low frequency movements in unemployment.     

Unemployment persistence in OECD countries after the Great Recession

The 2008 economic downturn in the United States resulted in a wave of contractionary effects across many OECD countries. This paper investigates the pattern of the unemployment persistence in the United States and other 28 OECD countries before and after the Great Recession. To detect possible changes in the pattern of unemployment persistence, we employ a mean bias-corrected estimation of the persistence parameter with a rolling window of five years. In addition, we estimate the most likely date of change in the trend function of unemployment to test whether there was any significant change in the pattern of unemployment persistence after the Great Recession. We find significant evidence of a structural break and hysteresis in unemployment rates, with a persistence parameter close to unity, across the United States and other 28 OECD countries. Besides, bootstrap permutation tests show that all half-lives and impulse response functions have significantly changed after the Great Recession. Therefore, our findings call for structural reforms aimed at improving labor market performance, to prevent upward shifts in unemployment across OECD countries from becoming permanent.     

Involuntary Unemployment: An Expository Note

This note is an effort to view the research program of Brecher and his co-workers to deploy tax incentives against involuntary unemployment in the broader context; on both the equity-efficiency trade-off in political economy, and the dual economic structure in the theoretic foundations of market equilibrium.     

Arjo Klamer,Conversations with Economists: New Classical Economists and Opponents Speak Out on the Current Controversy in Macroeconomics.

The impotency of fiscal policy resulting from budget deficits is called into question. Empirical observation is used to separate the underlying mechanism of the economy from the “intellectual toys and games” that constitute much of macroeconomics theory today.     

Large-Class Retention: The Effects of Method in Macroeconomics

This article deals with some of the same questions addressed by Kohen and Kipps in their article in this issue. There were important differences, however, in the approach to teaching economics; and these authors focus on some aspects of the retention issue not dealt with by the others. Class size was considered by Craig, O'Neill, and Elfner; and student attitude toward economics was also taken into account. Teachers who are interested in the lasting effects of economics instruction will want to study both articles very carefully.     

The Role of Demand in Macroeconomics

I argue that the standard approach represented by real business cycle theory is misguided, and that a fundamentally different approach is necessary. The new approach, based on the method of statistical mechanics, leads us to a new concept of “equilibrium”. In equilibrium we must have a distribution of productivities rather than a unique level of productivity. We then find that demand plays a crucial role in the determination of the aggregate output, as the old Keynesian economics claims. I show that the demand constraint is important not only in short‐run but also in long‐run economic growth.     

Inflation: The Invisible Foot of Macroeconomics*

We take a simple, well-known macroeconomic model and treat it as a game between two players—the government and an all-embracing union. The payoffs have the form of a prisoner's dilemma. The equilibrium outcome produces unwanted inflation and is not Pareto optimal. This is despite the fact that all participants are assumed to have full information. This result is shown to be quite robust to the form of the model and is not affected if one of the players is forced to announce its strategy in advance. This we call the invisible foot of macroeconomics.     

The Macroeconomics Curriculum: A Proposal for Change

Intermediate macroeconomics should be taught as a two-part sequence, with the first component based on a benchmark model that reflects accepted theory and applications to policy, with electives introduced in subsequent courses.