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Long-run and Cyclic Movements in the Unemployment Rate in Hong Kong: A Dynamic, General Equilibrium Approach

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  • Michael K. Salemi

    (University of North Carolina, Hong Kong Institute for Monetary Research)

Abstract

Prior to the late 1990s, low unemployment was a standard feature of macroeconomic life in Hong Kong. Between 1985 and 1997, the unemployment rate averaged 2.5 percent. But the picture changed dramatically thereafter with the unemployment rate rising to 6.2 percent by 1999 and remaining above 5 percent through 2005. What caused the large and sustained increase? This paper provides some answers with an analysis based on a dynamic, general equilibrium model of a small, open economy in which wage bargaining occurs. The model is calibrated using Hong Kong data for 1985 to 2005 and the calibrated model is analyzed in two ways. First, a set of comparative statics exercises investigates whether the natural rate of unemployment increased. Second, a dynamic analysis investigates whether the observed path of the unemployment rate might have been a temporary, although sustained, response to shocks. I conclude that the data favor the latter explanation.

Suggested Citation

  • 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.
  • Handle: RePEc:hkm:wpaper:192007
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    References listed on IDEAS

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    13. Chang-Tai Hsieh & Keong T. Woo, 2005. "The Impact of Outsourcing to China on Hong Kong's Labor Market," American Economic Review, American Economic Association, vol. 95(5), pages 1673-1687, December.
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