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Labour Market Dynamics in Australia: What Drives Unemployment?

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Author Info
Marika Karanassou () (Queen Mary, University of London)
Hector Sala () (Universitat Autonoma de Barcelona)

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Abstract

The debate in Australia on the (constant-output) elasticity of labour demand with respect to wages has wrongly sidelined the role of capital stock as a determinant of employment (Webster, 2003). As far back as 1991, Pissarides had argued that the influence of capital stock on the performance of the labour market is crucial but not well understood, a research area which is particularly relevant for Australia. This paper attempts to fill this void by estimating a multi-equation labour market model comprising labour demand, wage setting and labour supply equations. The model is used to examine the causes of the unemployment upturn in 1973-1983 and the subsequent decline in 1993-2006. Our results show that (i) the main determinants of the unemployment rise in the 1970s and early 1980s were wage-push factors, the two oil price shocks and the increase in interest rates, and (ii) the acceleration in capital accumulation was the crucial driving force of unemployment in the 1990s and 2000s. Furthermore, although the recent boom in the terms of trade is equally important, its downward effect on unemployment was partially reversed by the resulting decrease in net foreign demand.

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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-26.

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Length: 35 pages
Date of creation: Dec 2008
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Handle: RePEc:swe:wpaper:2008-26

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Related research
Keywords: Labour market dynamics; capital accumulation; chain reaction theory;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  35. Marika Karanassou & Hector Sala & Dennis Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Kiel Working Papers 1441, Kiel Institute for the World Economy. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Karanassou, Marika & Sala, Hector, 2009. "The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence," IZA Discussion Papers 4252, Institute for the Study of Labor (IZA). [Downloadable!]
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