How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory
This paper evaluates two theories of unemployment: the natural rate theory (whereby unemployment is depicted as fluctuating around a reasonably stable natural rate) and the chain reaction theory (which views movements in unemployment as the outcome of the interplay between labour market shocks and a network of lagged adjustment processes). We show that, for labour market systems with two common characteristics – lagged endogenous variables and growing exogenous variables – lags affect unemployment not only in the short run, but in the long run as well. The reason is that, in the presence of growing exogenous variables, the lagged responses are never able to work themselves out entirely. In this respect, the chain reaction theory contrasts sharply with the natural theory, which commonly views unemployment as approaching a natural rate determined solely by the values of the exogenous variables. The policy implications of the two theories are quite different as well. For an empirical model of the UK market, we show that unemployment does not converge to the natural rate, as conventionally defined. Furthermore, we show that lagged adjustment processes account for a substantial part of the UK long-run equilibrium unemployment rate and for the movement of UK unemployment over the past 15 years.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 108 (1998)
Issue (Month): 448 (May)
|Contact details of provider:|| Postal: Office of the Secretary-General, Rm E35, The Bute Building, Westburn Lane, St Andrews, KY16 9AR, UK|
Phone: +44 1334 462479
Web page: http://www.res.org.uk/
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishers.co.uk/asp/journal.asp?ref=0013-0133|
When requesting a correction, please mention this item's handle: RePEc:ecj:econjl:v:108:y:1998:i:448:p:832-49. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.