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The employment and output of Nations: Theory and policy implications

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  • Peretto, Pietro F.

Abstract

I build a dynamic general equilibrium model that is consistent with the trends in the participation, unemployment and employment rates for the US and major European economies over the last 50 years. I then use the model to study the interdependence of non-competitive labor and product markets in order to shed light on the effects of institutions and policies on employment and output. Unemployment harms output because it inserts a wedge between labor supply (participation) and employment. The distribution of income across wages and profits plays a central role in the economy's dynamics. The reason is that the wage share drives the labor market participation decisions of households, while the profit share drives the entry decisions of firms. Intuitively, one can think of entry decisions as another participation margin. I uncover feedback mechanisms linking the two markets that amplify the adverse effects on output of labor and product market frictions. These mechanisms have interesting policy implications.

Suggested Citation

  • Peretto, Pietro F., 2021. "The employment and output of Nations: Theory and policy implications," Economic Modelling, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321001693
    DOI: 10.1016/j.econmod.2021.105580
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    Cited by:

    1. James DeNicco & Christopher A. Laincz, 2018. "Jobless Recovery: A Time Series Look at the United States," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(1), pages 3-25, March.
    2. Lee, Kangoh, 2022. "Unemployment insurance, mobile capital, output, and distributive effects," Economic Modelling, Elsevier, vol. 115(C).
    3. Jakob Brochner Madsen, 2016. "Wealth And Inequality In Eight Centuries Of British Capitalism," Monash Economics Working Papers 20-16, Monash University, Department of Economics.
    4. Madsen, Jakob B., 2019. "Wealth and inequality over eight centuries of British capitalism," Journal of Development Economics, Elsevier, vol. 138(C), pages 246-260.
    5. Andrew T. Young & Hernando Zuleta, 2016. "Golden Rules of Wages," Southern Economic Journal, John Wiley & Sons, vol. 83(1), pages 253-270, July.
    6. Michael K. Salemi, 2007. "Long-run and Cyclic Movements in the Unemployment Rate in Hong Kong: A Dynamic, General Equilibrium Approach," Working Papers 192007, Hong Kong Institute for Monetary Research.

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    Keywords

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    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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