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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.

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File URL: http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/analisi_progammazione/working_papers/WP_n_5_MARZO_2011.pdf
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Bibliographic Info

Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number wp2011-5.

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Length: 44
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Handle: RePEc:itt:wpaper:wp2011-5

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Web page: http://www.dt.tesoro.it
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Related research

Keywords: Unemployment; Productivity growth; Volatility;

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References

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  1. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-28, February.
  2. Caju, P. Du & Fuss, C. & Wintr, L., 2012. "Sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 45(1), pages 7-22.
  3. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, vol. 96(2), pages 405-410, May.
  5. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
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Cited by:
  1. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 42-59.
  2. Xavier Raurich & Valeri Sorolla, 2014. "Growth, unemployment and wage inertia," UB Economics Working Papers 2014/309, Universitat de Barcelona, Facultat d'Economia i Empresa, UB Economics.

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