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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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    References listed on IDEAS

    as
    1. Gersbach, Hans, 2000. "Promoting Product Market Competition to Reduce Unemployment in Europe: An Alternative Approach?," Kyklos, Wiley Blackwell, vol. 53(2), pages 117-133.
    2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    3. Spector, David, 2004. "Competition and the capital-labor conflict," European Economic Review, Elsevier, vol. 48(1), pages 25-38, February.
    4. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    5. Paul Geroski & Paul Gregg & John van Reenen, 1995. "Market Imperfections and Employment," OECD Jobs Study Working Papers 5, OECD Publishing.
    6. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
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    Cited by:

    1. 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.
    2. Jakob Brochner Madsen, 2016. "Wealth And Inequality In Eight Centuries Of British Capitalism," Monash Economics Working Papers 20-16, Monash University, Department of Economics.

    More about this item

    Keywords

    Product Market; Labor Market; Market Structure; Employment; Unemployment;

    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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