Market forms and effective demand: Keynesian results with perfect competition ∗

In recent years there has been a flourishing of models with microfoundations based on imperfect (or monopolistic) competition that claim to yield Keynesian results which, it is held, are incompatible with perfect competi-tion. The paper shows that Keynes’s results do not depend on market forms but are contingent on his treatment of investment. In Keynes’s analysis, the existence of underemployment equilibria is demonstrated regardless of the assumed market form. Far from taking into account the importance of investment, recent models with ‘Keynesian results’ ignore investment altogether.

The article argues that if the investment demand function, with its distinctive characteristics, is removed, involuntary unemployment can be explained only by imperfections or rigidities that prevent producers from pushing their supply up to the level of full employment. A conclusion that Keynes wanted to avoid.

The introduction of a hypothesis of market forms different from imperfect competition may be useful in order to develop macroeconomics along more realistic lines, however, as the conclusions of the paper suggest, this hypothesis loses its analytical power if made separately from a satisfactory treatment of investment.     

An Equity-based Redefinition of Underemployment and Unemployment and Some Measurements

An attempt is made in this article to redefine underemployment and unemployment without making reference to an excess supply of labor or any causal mechanism of unemployment. Instead, underemployment and unemployment are defined in terms of equity which draws upon the individual's preferences. A specific proposal is that underemployment be defined by the presence of contribution inequity relative to at least half the persons employed in a field that the underemployed person might prefer to move into. Empirically, most recent survey data on preferences for contingent and other nontraditional employment are used to illustrate the application of the concept. The major finding is that nearly 10 million Americans in the nontraditional workforce are underemployed.     

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).     

Implicit contracts with effort incentives

The model combines the principal-agent approach with the analysis of labor contracts under demand uncertainty. Given the necessity to impose effort incentives the optimal contract is shown to maintain an efficient insurance with respect to the demand uncertainty and the employment risk. However, this efficient insurance may now yield either voluntary or involuntary layoff unemployment. Further, the optimal effort levels entail “underemployment” given adominant strategy incentive mechanism as well as under aNash-equilibrium mechanism. In contrast, the optimal employment levels fall short of achieving efficient production only in the latter case.     

Heterogeneous determinants of local unemployment in Poland

We identify determinants of large disparities in local unemployment rates across Poland. Using an extensive panel data-set on the NUTS-4 level (i.e. the poviats level, or districts or counties level) we examine a wide range of determinants of local unemployment. Our research examines two groups of the determinants: one related to equilibrium theory and the other related to disequilibrium theory of local unemployment. We find that demographics, education and sectoral employment composition exert a stronger impact over rates of local unemployment than various demand factors. The impact of the determinants, while robust for outliers, is not homogeneous across Polish regions. In particular, in the most depressed local labour markets, skill improvement programmes do not appear to work and unemployment rates are relatively less responsive to investment. Our research suggests that there is no easy cure for local unemployment in Poland, but a few policies have the potential to slightly reduce existing disparities.     

Capital Stock, Unemployment and Wages in the UK and Germany

This paper is concerned with the view that capital formation is an important variable in the determination of unemployment and wages in Germany and the UK. Adverse demand shocks affect employment and investment. When shocks reverse, unemployment may not fall to previous levels due to insufficient capital. The empirical results show that unemployment has risen in the last twenty years in both countries due to insufficient investment. Policies that are aimed at stimulating investment may have a permanent effect on unemployment in Germany and the UK.     

Keynes,investment, unemployment and expectations

In Keynes’ General Theory, investment determines effective demand, which determines unemployment and the labour market plays a negligible role. In New Keynesian models, labour market institutions determine the natural rate of unemployment and the speed at which unemployment adjusts to it. Investment is mostly ignored as a key variable behind the problem of high unemployment, despite a strong empirical association between investment and unemployment. We discuss the evolution of the ‘Keynesian’ model, and how in the process of domesticating the General Theory, the central relationship between unemployment and investment and the role of the state of confidence was bred out of the model. We then present some evidence of the centrality of investment and expectations to the long‐term evolution of unemployment in OECD countries. We also argue that recent results in finance, which find that individuals do not behave rationally and, moreover, that there may be no basis for rational calculation, provides support for Keynes’s notion that animal spirits play a central role in investment.     

Hidden Unemployment in Estonia: Experience from the Early Years of Transition (1989‐1996)

The aim of this article is to develop and deepen the discussion on this topic and analyse the methods of measuring hidden unemployment. This is important for giving an adequate overview of the situation of the labour market in Estonia and the scope of hidden unemployment and its development in the transition period. The following tasks are set to achieve this aim: to estimate different components of hidden unemployment in Estonia and to analyse the factors that influence this phenomenon in Estonia and thence form policy conclusions. In the analysis data from the Estonian Labour Force Survey (ELFS 97) carried out in 1997 are examined. Three logit models were calculated (for unemployed, underemployed and discouraged persons). The most important findings were that there are no general factors which could influence open and hidden unemployment at the same time, and that the factors influencing the components of hidden unemployment differ—underemployment is probably influenced more by economic factors and discouragement more by psychological factors.     

Rural-urban migration,urban unemployment and underemployment,and job-search activity in LDCs

A quantity adjustment framework is used to analyze unemployment and underemployment in less developed countries (LDCs). The basic premise of the formal theoretical model presented is that the same kinds of forces that explain the choices of workers between the rural and urban sectors can also explain thier choices between 1 labor market and another within an urban area and are most likely made simultaneously. The decision makers, whether family units or individuals, are presumed to consider the various labor market opportunities available to them and to choose the one which maximizes their expected future income. In the model the primary equilibrating force is taken to be the movement of workers between labor markets, not changes in wages. The point of departure is the received theory of rural urban migration in LDS, which is the model of Harris and Todaro (1970). The 1st step is a summary of the basic features of the model. While accepting their basic approach emphasizing movement of workers rather than changes in wages, it is shown that the particular implication of the model with respect to the equilibrium urban unemployment rate substantially overstates the rates actually observed by Turnham (1971) and others. The analysis is then extended to consider several important factors which have previously been neglected--a more generalized approach to the job search process, the possibility of underemployment in the so-called urban "murky sector," preferential treatment by employers of the better educated, and consideration of labor turnover--and demonstrate that the resulting framework gives predictions closer to actual experience. Harris and Todaro in their original discussion concluded that a combination of a wage subsidy in the modern sector and physical restriction of migration would be required to realize a first best state lying on the economy's production possibility frontier. Subsequently Bhagwati and Srinivasan (1974) challenged them and demonstrated that a first best solution can be achieved by means of a variety of alternative tax or subsidy schemes, none of which require migration restriction. This analysis suggests 3 additional policy variables, beyond those considered by either pair, which might be expected to have an important effect on the volume of unemployment and underemployment in LDCs: a smoothly functioning labor exchange would reduce the incentive to remain unemployed while searching for a superior job; the size of the educational system would also influence the amount of unemployment; and it is job hiring in the modern sector, more than the number of jobs, which primarily influences workers' locational decisions.     

A New Look at Old Issues: Keynesian Unemployment Revisited

Economists have long sensed that the failure of goods markets to clear is a prime reason for the emergence of unemployment. The novel feature of this paper is that it discovers a new theoretical basis proving this assumption. The paper claims that in a permanently growing economy, unemployment may be due to the failure of the markets to provide consumers with ever‐new varieties of consumption goods. As the difference between desired and available product widens, effective demand declines, leading on the one hand to unemployment, which exhibits a decisive Keynesian flavour as it is the result of goods markets failures, and on the other hand to an increase in involuntary savings, which provide the financial basis to foster innovation and growth. As the higher growth rate increases the probability of failures in effective demand, it further increases unemployment and increases involuntary savings, resulting in a finite multiplier process.     

Reworking the Wage Curve: Exploring the consistency of the model across time,space and demographic group

This paper extends Blanchflower & Oswald's (1994) work on the wage curve to the 50 largest metropolitan areas in the United States. The wage curve is more elastic in US metropolitan areas than prior research shows for the nation as a whole, and the wage curve varies over the business cycle, becoming more elastic in periods of higher unemployment. The most striking finding is that black workers have a more elastic wage curve than do white workers. Estimating the wage curve with the non-employment rate, a measure of underemployment, shows elasticities that are substantially higher than for wage curves estimated with the unemployment rate. This trend further increases the negative effects on pay for blacks, who are more likely than white workers to be underemployed.     

LDC stabilization policies,price and output adjustment: theory and evidence, 1974–83

This paper introduces a method for the analysis of regional differences in the utilization of labour resources. The method developed is a version of ‘components-of-change’ analysis in which labour force utilization in each regional labour market is compared with the sitation of a labour market with the highest level of utilization. The aggregate measure is split up into three components: open (registered) unemployment, hidden unemployment and underemployment. The effects of structural factors on aggregate differences are also estimated. In the empirical section the situation of Finnish provinces in 1989 is analysed within the framework developed. The results indicated the existence of large regional differences in the utilization of labour resources.     

Technology–Policy Interaction in Frictional Labour-Markets

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology–policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.     

Multiplicity of Cournot Equilibria and Involuntary Unemployment

In an overlapping generations model with Cournot competition on the goods market it is shown that a continuum of stationary states and perfect foresight trajectories exists with unemployment at arbitrary low wages. Decisive for this is the influence that different forecast functions have on the objective demand curve, even though they are consistent with perfect foresight. With an example it is shown that simple adaptive and constant memory forecast rules generate such unemployment equilibria. The corresponding temporary equilibrium dynamics may display stable unemployment and unstable full employment equilibria.Journal of Economic LiteratureClassification Numbers: D43, D51, E24     

Immigration and the natural rate of unemployment in Australia

This paper presents an indirect test of the proposition that a decrease in the rate of immigration into Australia during the early 1960s lowered the efficiency with which unemployed persons and unfilled job vacancies were matched, and increased labor turnover, thereby increasing the “natural” rate of unemployment. A theoretical model of employment growth is used to derive an expression for the steady-state relationship between unemployment and vacancies. Estimates of the model are obtained for the period 1955i–1973ii during which distinctly different immigration levels occurred. The empirical results are not consistent with the contention that a decrease in immigration caused the relationship between unemployment and job vacancies in Australia to shift outward. Therefore, the evidence suggests that the unemployment rate associated with a given level of labor demand was not significantly increased by the reduction in immigration to Australia.     

Involuntary unemployment: the missing piece in Keynes's General Theory *

Using a retrospective methodology, my paper examines critically the insights on involuntary unemployment offered by Keynes in his General Theory. Keynes, it is argued, gave involuntary unemployment a modern micro-founded definition yet — quite opportunely, in view of the difficulty of the task—did not attempt to provide a direct microeconomic explanation of it Rather, his claim to the demonstration of its existence rests on an indirect argument, where involuntary unemployment emerges at the corollary of effective demand falling short of its full employment level. This justification is based on the more or less tacit assumption that involuntary unemployment and effective demand-deficiency are equivalent. This claim of equivalence, it will be argued, is wanting. Hence the view that involuntary unemployment may have been demonstrated through the proxy of demand-deficiency falls. My paper evaluates whether Keynes's other arguments in favour of involuntary unemployment are robust. Several alternative interpretations of his General TheoryChapter Two ‘fundamental observation’, focusing respectively on money illusion, adjustment flaws, and resistance to cuts in nominal wages, are discussed. Here also the verdict will be negative. The general conclusion then follows that no solid explanation for the existence of involuntary unemployment is to be found in theGeneral Theory.     

总需求和总供给冲击对我国失业和产出动态关系的影响分析

在我国的失业产出关系中,短期内,总供给冲击是产出波动的主要来源,总需求冲击则是失业波动的主要来源,总需求冲击和总供给冲击共同破坏了产出失业之间反向变化关系,但是总需求冲击的破坏作用更多一些。在长期,总需求冲击对产出没有影响,总供给冲击对产出有显著的正的影响,总需求冲击在长期对失业没有影响,但总供给冲击在长期会对失业产生不利影响,即正的供给冲击的累积影响所带来的产出增加在长期使我国的失业率上升。     

Efficiency Wages and Nominal Income Targeting in an Open Economy

Abstract. This paper considers the choice between nominal income and money supply targeting in an open economy with efficiency wages. The results show that, when real unemployment benefits are rigid, both nominal income and money supply targeting have the same stabilizing performance. On the contrary, if nominal unemployment benefits are rigid, then we come to a conclusion that either in the face of goods demand shocks or aggregate supply shocks, a sufficient condition for nominal income targeting to be preferable is that the income elasticity of money demand be less than unity.     

Hymer and Uneven Development Revisited: Foreign Direct Investment and Regional Inequalities

Picking up on one of Hymer's key contributions, this paper examinesthe impact that inward foreign direct investment (FDI) intothe UK has on the patterns of development, both within and acrossregions. Using a panel of data for the manufacturing sector,the paper illustrates that even where one isolates the effecton the domestic sector alone, inward investment acts to increasethe demand for skilled, relative to unskilled labour, and alsogenerates the expected agglomeration effects in terms of thedemand for capital investment. The paper then goes on to drawcertain policy comparisons between these findings and the desiredaim of attracting FDI, notably to increase demand for labourin those regions suffering structural unemployment, and secondlyto reduce the disparities between regions.     

经济滞胀风险及其宏观政策选择

我国经济的深层隐患不仅是通胀问题,更是通胀、停滞与失业并存的"滞胀"问题。相关分析表明,滞胀的风险来自于"投资拉动、出口依赖"的经济增长方式、货币超经济发行、流动性过剩、收入分配失衡、外部输入性以及不合理的经济体制等因素的叠加作用。抑制政府的投资冲动和财政需求,保障民生、促进社会公平、培育新的经济增长点,实现经济的内生型增长是今后我国宏观政策的关键所在。