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Unemployment and productivity in long-run: the role of macroeconomic volatility

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  • Pierpaolo Benigno
  • Luca Antonio Ricci
  • Paolo Surico

Abstract

We propose a theory of low-frequency movements in unemployment based on downward real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.

Suggested Citation

  • Pierpaolo Benigno & Luca Antonio Ricci & Paolo Surico, "undated". "Unemployment and productivity in long-run: the role of macroeconomic volatility," Working Papers wp2011-5, Department of the Treasury, Ministry of the Economy and of Finance.
    • Handle: RePEc:itt:wpaper:wp2011-5
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    More about this item

    Keywords

    Unemployment; Productivity growth; Volatility;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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