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Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.

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File URL: http://patrickminford.net/wp/E2006_25.pdf
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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/25.

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Length: 33 pages
Date of creation: Jan 2006
Date of revision: Nov 2006
Publication status: Published in European Journal of Political Economy Volume 24, Issue 3, September 2008, Pages 605-614
Handle: RePEc:cdf:wpaper:2006/25
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