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Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA

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Author Info
Matthews, Kent () (Cardiff Business School)
Minford, Patrick () (Cardiff Business School)
Naraidoo, Ruthira

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Abstract

The 1930s in the UK and USA is remembered as the decade of mass unemployment. We develop a model of equilibrium unemployment based on the Meltzer and Richard (1981) model of redistribution financed by distortionary taxation. This model is extended to the UK and the US interwar period to provide a theory of an endogenous natural rate of unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) 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 react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks; and further evidence is obtained by structural estimates for the UK.

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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/7.

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Date of creation: Jan 2006
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Handle: RePEc:cdf:wpaper:2006/7

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Related research
Keywords: Equilibrium unemployment political economy 'vicious' and 'virtuous' circles threshold model bootstrapping

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General

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  6. Randall Parker & Philip Rothman, 1998. "The Current Depth-of-Recession and Unemployment-Rate Forecasts," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 2(4), pages 159-177. [Downloadable!] (restricted)
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  24. Wright, Randall, 1986. "The redistributive roles of unemployment insurance and the dynamics of voting," Journal of Public Economics, Elsevier, vol. 31(3), pages 377-399, December. [Downloadable!] (restricted)
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