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Hysteresis and the European Unemployment Problem

In: NBER Macroeconomics Annual 1986, Volume 1

  • Olivier J. Blanchard
  • Lawrence H. Summers

European unemployment has been steadily increasing for the last 15 years and is expected to remain very high for many years to come. In this paper, we argue that this fact implies that shocks have much more persistent effects on unemployment than standard theories can possibly explain. We develop a theory which can explain such persistence, and which is based on the distinction between insiders and outsiders in wage bargaining. We argue that if wages are largely set by bargaining between insiders and firms, shocks which affect actual unemployment tend also to affect equilibrium unemployment. We then confront the theory to both the detailed facts of the European situation as well as to earlier periods of high persistent unemployment such as the Great Depression in the US.

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This chapter was published in:
  • Stanley Fischer, 1986. "NBER Macroeconomics Annual 1986, Volume 1," NBER Books, National Bureau of Economic Research, Inc, number fisc86-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 4245.
    Handle: RePEc:nbr:nberch:4245
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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