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The role of demand management policies in reducing unemployment

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  • Charles R. Bean

Abstract

This paper considers the scope for demand management policies to reduce the present high levels of European unemployment. While the evidence suggests that contractionary demand shocks are partly to blame, the presence of endogenous persistence mechanisms limit the scope for effective activist policies. Furthermore, in isolation they can do nothing to tackle the significant fraction due to adverse supply, or structural, developments. However, if appropriate supply-side policies are introduced, supportive demand management policies can speed the reduction in unemployment. The paper considers what such supportive demand management policies should look like and argues that in some cases a mild, although temporary, increase in inflation may be appropriate. The implications of uncertainty about the equilibrium rate of unemployment are also considered. The paper argues that such supportive policies are probably best sustained through monetary rather than fiscal policies and are likely to require changes in intra-European real exchange rates. Consequently a rapid move to full monetary union may be ill advised. Finally a potential role for temporary incomes policies is also identified.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (1994)
Issue (Month): Jan ()
Pages: 99-167

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Handle: RePEc:fip:fedkpr:y:1994:i:jan:p:99-167

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Keywords: Labor market ; Unemployment ; Inflation (Finance) ; Welfare;

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References

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  1. Meade, James E., 1977. "The Meaning of "Internal Balance"," Nobel Prize in Economics documents 1977-2, Nobel Prize Committee.
  2. Blanchard, Olivier Jean & Diamond, Peter A, 1994. "Ranking, Unemployment Duration, and Wages," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 417-34, July.
  3. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  4. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
  5. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
  6. Frankel, Jeffrey A & Rockett, Katharine E, 1988. "International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model," American Economic Review, American Economic Association, vol. 78(3), pages 318-40, June.
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Cited by:
  1. Andrew Martin, 2000. "Social Pacts, Unemployment, and EMU Macroeconomic Policy," EUI-RSCAS Working Papers 32, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  2. Werner Sesselmeier & Wilfried Fuhrmann & Christian Scholz & Uwe Walz & Rainer Schweickert & Axel Börsch-Supan & Margareta Kulessa, 1999. "Book reviews," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 171-188, March.
  3. Berthold, Norbert & Fricke, Holger, 2007. "Volkswirtschaftliche Auswirkungen der finanziellen Ausgleichsysteme in Deutschland," Wirtschaftswissenschaftliche Beiträge 93, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  4. Juan J. Dolado & Juan F. Jimeno, . "The causes of Spanish unemployment: A structural VAR apporach," Working Papers 96-19, FEDEA.
  5. Floro Ernesto Caroleo, 2000. "Le politiche per l'occupazione in Europa: una tassonomia istituzionale," STUDI ECONOMICI, FrancoAngeli Editore, vol. 2000(71).
  6. Calmfors, Lars, 1998. "Unemployment, Labour-Market Reform and Monetary Union," Seminar Papers 639, Stockholm University, Institute for International Economic Studies.
  7. Ansgar Belke & Daniel Gros, 1999. "Estimating the costs and benefits of EMU: The impact of external shocks on labour markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 1-47, March.
  8. Luis Alberiko Gil-Alana & Pedro Garcia-del-Barrio, . "New Revelations about Unemployment Persistence in Spain," Faculty Working Papers 10/06, School of Economics and Business Administration, University of Navarra.
  9. López Díaz, J., 1999. "Divergencia real en la unión monetaria: Un ejercicio de simulación," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 13, pages 87-100, Diciembre.
  10. Jürgen Von Hagen, 1999. "Macroeconomic Consequences of the EMU," Empirica, Springer, vol. 26(4), pages 359-374, December.

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