The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).     

Productivity,real exchange rate,and aggregate demand: An empirical exercise applied to Brazil from 1960 to 2011

This research analyzes, from a post Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity, and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: (a) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; (b) understanding the relationship between the real exchange rate and the productivity and growth regimes; (c) proposing a theoretical model that relates the real exchange rate, productivity, and the growth regime; and (d) an empirical test of the interaction between the real exchange rate, productivity, and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity, and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.     

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.     

The impact of productivity and demand shocks on structural dynamics: Evidence from Austrian manufacturing

Based on Pasinetti's model of structural dynamics we develop an empirical identification strategy for aggregate and sectoral labor productivity and demand shocks in a structural vector autoregressive model with long-run restrictions. Impulse response analysis shows that we can distinguish four patterns of the effects of changes in demand and productivity growth on sectoral output growth. For some industries demand is indeed the factor driving sectoral growth. Labor productivity and demand shocks are closely associated with the growth rates of employment and output across industries. However, there is less correlation with entry and exit. This suggest that structural change within and between industries may have quite different determinants.     

Slow recoveries

Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a link between aggregate growth and plant dynamics through its effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper, we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth, and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed policies that alter plant dynamics can explain slow recoveries. We also find that output losses associated to delayed recoveries are large.     

Demand-led Growth Theory: A Historical Approach

This paper builds upon the Keynesian theory of demand-led growth in order to provide an analytical framework for explaining economic growth and development in concrete terms, consistent with the fundamental idea that growth in output and employment is determined by the growth in aggregate demand. The framework employs a historical approach to identify the main factors and their role in explaining demand-led growth and the accumulation process. The theoretical model developed abandons steady-state conditions by proposing that capacity utilisation varies in the long run as well as in the short run to ensure output has the elasticity to accommodate levels of autonomous demand free of any capacity saving constraint. On the basis of our analytical framework, the paper considers the main factors that explain the growth in aggregate demand: first, by examining the variables that determine the ‘super-multiplier’ and what social, institutional and technical conditions can cause its value to change over time; second, by identifying the components of autonomous demand and the main forces explaining their growth; and third, by considering the manner in which technical progress promotes demand-led growth.     

R&D‐induced Growth in the OECD?

The study uses aggregate and manufacturing sector data for a group of ten OECD countries for the period 1971 to 1995 to estimate a system of two equations implied by a model of R&D‐induced growth in steady state. These equations relate R&D intensity to productivity growth and the latter to output growth. The author finds evidence of a positive impact of aggregate R&D intensity on the growth rates of productivity and output. The null hypothesis that growth is not induced by R&D is rejected in favor of the Schumpeterian endogenous growth framework without scale effects. The R&D impact for the aggregate economy is distinctly larger than for the manufacturing sector. Finally, an extension of the empirical model shows that openness has a positive impact on productivity growth.     

Real wages,productivity and economic growth in the G7, 1960–2002

Abstract

This paper investigates empirical real wage and productivity dynamics in the G7 countries using annual data for 1960–2002. The findings suggest that the level of labor productivity is positively related to GDP growth in all countries, and real wages are positively related to growth in some of them. The results tend to confirm the ‘profit paradox’. This postulates a positive relationship between economic growth and the aggregate profit share, and suggests that the frequent support of business interests for deflationary economic policies is a puzzle.     

Book Reviews

Abstract

This paper argues that exchange rate models rooted in the theory of Purchasing Power Parity (PPP) and balanced trade are fundamentally mis-specified, as evidenced by the disjuncture between: (1) the empirical evidence, which largely refutes PPP; and (2) the empirical result that ‘real’ productivity shocks are associated with observed secular trends in exchange rates. In the former case we have a theory without convincing evidence, and in the latter case we have empirical evidence in want of a consistent theory. If looked at from the perspective of a ‘cost of production’ theory of prices, such empirical results might not be so theoretically anomalous. So-called ‘real’ variables (especially productivity and unit labor costs), let in through the side door as ‘shocks’ to PPP equilibrium, may in fact be part and parcel of the formation of prices of production on an international scale through capitalist competition. The primary conclusion is that the empirical evidence supports a cost of production theory of the terms of trade and the real exchange rate. The empirical evidence in support of the Balassa–Samuelson model of the exchange rate is re-interpreted in this light. In this interpretation, parity holds only in terms of rates of return on investment which, in the classical tradition, are presumed to equalize across industries internationally.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

Supply and Demand in the Theory of Long-run Growth: Introduction to a symposium on demand-led growth

Recent developments in growth theory have encouraged a revisionist interpretation of the field. According to this interpretation long-run growth should be, and always has been, interpreted as a supply-side process. The focus of this symposium is the macro-economics of demand-led growth. As a precursor to the contributions that follow, two central insights of demand-led growth theory are highlighted. First, chronic effective demand problems create a role for aggregate demand in determining the utilization rates of productive resources, even in the long run. Second, the demand-led actual rate of growth influences both the accumulation and productivity of factor inputs, and hence the economy's potential rate of growth.     

Trade and technological explanations for changes in sectoral labour demand in OECD economies

This paper sets out to establish the main determinants of variations in the demand for aggregate labour in manufacturing and service sectors (22) for a cross-section of OECD countries (14). A relatively new panel data set is employed in the analysis, the OECD's International Sectoral Data Base. Preliminary analysis revealed that the ‘within’ sector variation in the wage share dominated overall variation for most countries and time periods. A separate dynamic model was thus generated to explain the ‘within’ sector variation in the wage share. This model contained real wages, output, the capital stock, technological change (total factor productivity) and trade (the imports to value-added ratio) as independent variables. In addition the wage level was also interacted with these explanatory variables on the presumption that skill is positively correlated with the level of wages. Because of the potential for simultaneity bias, estimation was conducted by IV and OLS. The main findings were that the capital stock and technological change were the main determinants of shifts in labour demand. While some countries reported the trade variable as significant its influence was only of slight importance in most cases. The interaction terms proved to be significant in a large number of countries. Some evidence was found that capital and technological were complementary with skill. Overall it was found that broad agreement existed across countries in the factors which influence labour demand despite considerable differences in the cross-country nature of labour market institutions.     

Convergence: International comparisons based on a simultaneous equation model with regional effects

A structural model incorporating regional effects is fitted to cross-sectional data for 60 countries. The model integrates various strands in the literature, including the dynamic Verdoorn Law linking productivity growth to output growth, and relationships between educational attainment, trade and innovativeness. Most notably, the structural model supports the thesis that a country's innovativeness and, consequently, capital stock growth, depend on the level of technology in the 'surrounding' region.The approach adopted is set within the context of the theoretical and empirical analysis of increasing returns and cumulative causation. However, the resulting parameter estimates lead to a reduced form that implies convergence to an equilibrium rather than divergent productivity levels. The equilibrium productivity level ratios (vis-à-vis the USA) indicate that countries are converging on different levels, although a group does attain the USA productivity level.     

Constructing the Monetary Conditions Index for China

How can we fit different monetary transmission channels together to understand the effect of China’s monetary policy? This paper focuses on China’s monetary conditions and aggregate demand in terms of the monetary conditions index (MCI), which has been widely used as an important indicator for central banks, financial institutions, and scholars. To construct an MCI in the context of China over 1987Q1–2010Q2, we consider three channels through which monetary conditions might influence aggregate demand: the primary lending rate, the real effective exchange rate, and the bank credit. The weights of the component variables are obtained by estimating both the IS equation and the vector autoregressive model (VAR), which yield somewhat similar results. Further empirical tests show that the MCIs we derived contain useful information about future output growth and inflation in China over the short and medium term. From a historical perspective, the MCI we derived is more informative than individual monetary variables for the understanding of the development of China’s monetary conditions between 1987 and 2010.     

International technological knowledge differences and economic growth comparisons: USA versus West Germany and Sweden versus Norway, 1963–1988

The main interest in this paper is governed by the methodology for making evolutive growth comparisons in the international context. The paper analysis differences in levels, and changes of these levels of aggregate output between the above mentioned countries, in terms of differences in factors input and levels of technological knowledge, for the period 1963–1988. Sources of economic growth in each country are also examined on an annual and average annual basis. Th conclusion is that technological knowledge differences between countries hold a central role in explaining output differences between them. A slight overtake of the technological lead is observed in comparing Sweden and Norway between 1977 and 1985 when a recovery by Sweden begining in 1986 is detected. A certain part of the output differences between the US and West Germany is explaining by the differences in technology between these two countries. However, capital intensity in the US is found to be almost double in 1988, and this accounts for a great part of the differences in output per unit of labour input between the two countries in that year. It is suggested that while technological knowledge or total factor productivity seems to hold the stage in explaining output differences over time and among the countries here analysed, technological developmment is itself a phenomenon to be explained, this being a part of a long intellectual ‘walk’ by the author.     

A demand and supply analysis of productivity growth

The paper rejects growth accounting as failing to reveal the economic forces that drive growth. Instead, it seeks to explain changing productivity growth in terms of economic phenomena such as the changing structure of output, the rate of adoption of new technology, and the strength of aggregrate demand. We introduce such a model and test it using pooled cross section and time series data for 16 OECD economies over a 30 year period. The parameter estimates allow us to decompose each economy's productivity growth into the part caused by its changing structure and the part explained by demand conditions. The estimates are used to account for the productivity slowdown that occurred in these economies after 1973, and to examine the recent productivity increase in the US. The model fully explains this growth surge in terms of the changed demand factors and structure of the US economy. We conclude by arguing that a prime benefit of strong aggregate demand is its stimulation of investment and technological change, leading to the adoption of new technology on a broad front.     

Did the rising importance of services decelerate overall productivity improvement of Turkey during 2002–2007?

This paper answers the question of what would have been the growth rate of aggregate productivity in Turkey between 2002 and 2007, had it realized China’s rates of productivity growth in agriculture, industry, and services. It does this in a three-sector general equilibrium model calibrated to the Turkish economy over the 2002–2007 period. The main findings are: (i) Turkey would have had much higher aggregate productivity growth over this period if it had experienced China’s service sector productivity growth; (ii) very low productivity growth rates in finance and in the non-market service sector are the main culprits behind Turkey’s weak service-sector performance.     

SUBSIDIES AS OPTIMAL FISCAL STIMULI

Theoretical macroeconomic models typically take fiscal policy to mean tax‐and‐spend by a ‘benevolent government’ that exploits potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd‐out private consumption and typically reduce welfare. On account of their widespread use to stimulate economic activity, we consider the use of ‘tax‐and‐subsidize’ instead of ‘tax‐and‐spend’ policies. Within a static general equilibrium macro‐model with imperfectly competitive goods markets, we examine the effects of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximize welfare, rendering no intervention suboptimal. We also show that, within a two‐country setting, a Nash non‐cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between governments in setting these rates is more expansionary and leads to an improvement upon the non‐cooperative solution.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000