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Vicious and Virtuous Circles - The Political Economy of Unemployment

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  • Minford, Patrick
  • Naraidoo, Ruthira

Abstract

We develop a theoretical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The theory here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks (mainly demand-management 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 react to shocks by demanding more or less social protection. The results from a dozen OECD economies appear to confirm a pattern of unemployment behaviour in which unemployment moves with nonlinear dynamics between high and low equilibria in response to shocks obtained. The policy conclusion is that macroeconomics and supply side policies are intimately linked through political economy and these have the capacity to create both ‘vicious’ and ‘virtuous’ circles of economic performance.

Suggested Citation

  • Minford, Patrick & Naraidoo, Ruthira, 2002. "Vicious and Virtuous Circles - The Political Economy of Unemployment," CEPR Discussion Papers 3618, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3618
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    Cited by:

    1. Matthews, Kent & Minford, Patrick & Naraidoo, Ruthira, 2008. "Vicious and virtuous circles -- The political economy of unemployment in interwar UK and USA," European Journal of Political Economy, Elsevier, vol. 24(3), pages 605-614, September.
    2. Naveen Srinivasan & Pratik Mitra, 2014. "The European unemployment problem: its cause and cure," Empirical Economics, Springer, vol. 47(1), pages 57-73, August.
    3. Franchi, Massimo & Ordóñez, Javier, 2011. "Multiple equilibria in Spanish unemployment," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 71-80, February.
    4. Yu‐Fu Chen & Michael Funke, 2005. "Non‐Wage Labour Costs, Policy Uncertainty And Labour Demand – A Theoretical Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(5), pages 687-709, November.
    5. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo.
    6. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.

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    More about this item

    Keywords

    equilibrium employment; political economy; vicious and virtuous circles;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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