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The Employment (and Output) of Nations: Theory and Policy Implications

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  • Pietro F. Peretto

Abstract

I study the effects of product and labor market frictions in a dynamic general equilibrium model with a three-states representation of the labor market. Firms bargain with unions over wages and employment levels. This generates unemployment. Households take the associated unemployment risk as given in making participation and consumption-saving decisions. Unemployment harms output because it inserts a wedge between labor supply (participation) and employment. New firms make entry decisions based on expected future profitability as determined by macroeconomic conditions. The model produces dynamics consistent with the long-run trends exhibited by the US and EU15 economies over the last 40-50 years. It also features feedback mechanisms linking the two markets that amplify the adverse effects on output of labor and product market frictions. These multiplier effects have interesting policy implications.

Suggested Citation

  • Pietro F. Peretto, 2010. "The Employment (and Output) of Nations: Theory and Policy Implications," Working Papers 10-20, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:10-20
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    Cited by:

    1. is not listed on IDEAS
    2. 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.
    3. Lee, Kangoh, 2022. "Unemployment insurance, mobile capital, output, and distributive effects," Economic Modelling, Elsevier, vol. 115(C).
    4. Jakob Brochner Madsen, 2016. "Wealth And Inequality In Eight Centuries Of British Capitalism," Monash Economics Working Papers 20-16, Monash University, Department of Economics.
    5. Madsen, Jakob B., 2019. "Wealth and inequality over eight centuries of British capitalism," Journal of Development Economics, Elsevier, vol. 138(C), pages 246-260.
    6. Andrew T. Young & Hernando Zuleta, 2016. "Golden Rules of Wages," Southern Economic Journal, John Wiley & Sons, vol. 83(1), pages 253-270, July.
    7. 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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