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Unemployment and the economics of gradualist policy reform

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  • Michael Gavin

Abstract

This paper investigates the efficiency of adjustment to economic reform programs when the cost of adjustment arises from high unemployment that can be generated as contracting sectors shrink faster than expanding sectors grow. Under plausible assumptions on the adjustment process, the speed of adjustment to “shock therapy” reforms is shown to be excessively rapid, and the rate of unemployment to be excessively high during the transition to the new equilibrium. The authorities can improve the efficiency of the adjustment by removing the distortion gradually, rather than abruptly. Gradualism has beneficial income distributional, as well as efficiency properties, because it improves welfare of the unemployed, who are necessarily the least advantaged social group in this model.

Suggested Citation

  • Michael Gavin, 1996. "Unemployment and the economics of gradualist policy reform," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(3), pages 239-258.
    • Handle: RePEc:taf:jpolrf:v:1:y:1996:i:3:p:239-258
    DOI: 10.1080/13841289608523363
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    Cited by:

    1. Andrew Feltenstein & Saleh M. Nsouli, 2003. ""Big Bang" Versus Gradualism in Economic Reforms: An Intertemporal Analysis with an Application to China," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 1-6.
    2. Alshyab, Nooh, 2013. "The Political Economy of Reform and Development of the Washington Consensus," MPRA Paper 46014, University Library of Munich, Germany.
    3. Leonardo Baccini, 2010. "Explaining formation and design of EU trade agreements: The role of transparency and flexibility," European Union Politics, , vol. 11(2), pages 195-217, June.
    4. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.

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