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Vicious And Virtuous Circles - The Political Economy Of Unemployment

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  • Patrick Minford
  • Ruthira Naraidoo

Abstract

We develop an empirical non-linear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The model here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of 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 of unemployment react to shocks by demanding more or less social protection. The reduced form results from a dozen OECD economies give support to the model prediction of a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks and the model specification is superior in forecasting performance out of sample to alternative models of "generalised hysteresis". Copyright (c) 2010 The Authors. Journal compilation (c) 2010 Economic Society of South Africa.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 78 (2010)
Issue (Month): 1 (03)
Pages: 1-22

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Handle: RePEc:bla:sajeco:v:78:y:2010:i:1:p:1-22

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Cited by:
  1. Ruthira Naraidoo & Patrick Minford & Kent Matthews, 2006. "Vicious and Virtuous Circles - the Political Economy of Unemployment in Interwar UK and USA," Keele Economics Research Papers KERP 2006/08, Centre for Economic Research, Keele University.
  2. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
  3. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.

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