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

  • Michael K. Salemi

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

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    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.

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    File URL: http://www.hkimr.org/uploads/publication/178/ub_full_0_2_161_hkimr-working-paper-no-19_bw.pdf
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    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 192007.

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    Length: 40 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:hkm:wpaper:192007
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    1. Wouter Den Haan & Christian Haefke & Garey Ramey, 2001. "Shocks and Institutions in a Job Matching Model," NBER Working Papers 8463, National Bureau of Economic Research, Inc.
    2. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    3. Lindblad, Hans & Sellin, Peter, 2003. "The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach," Working Paper Series 152, Sveriges Riksbank (Central Bank of Sweden).
    4. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
    5. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    6. 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.
    7. Hans Genberg & LaurentL. Pauwels, 2005. "Wage-Price Dynamics And Deflation In Hong Kong," Pacific Economic Review, Wiley Blackwell, vol. 10(2), pages 191-216, 06.
    8. A. J. Abbott & G. De Vita, 2002. "Long-run price and income elasticities of demand for Hong Kong exports: a structural cointegrating VAR approach," Applied Economics, Taylor & Francis Journals, vol. 34(8), pages 1025-1032.
    9. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
    10. Pietro F. Peretto, 2010. "The Employment (and Output) of Nations: Theory and Policy Implications," Working Papers 10-20, Duke University, Department of Economics.
    11. Wouter J. den Haan & Garey Ramey & Joel Watson, 1997. "Job Destruction and Propagation of Shocks," NBER Working Papers 6275, National Bureau of Economic Research, Inc.
    12. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    13. Hans Genberg & Laurent L. Pauwels, 2003. "An Open Economy New Keynesian Phillips Curve: Evidence from Hong Kong," IHEID Working Papers 03-2003, Economics Section, The Graduate Institute of International Studies.
    14. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc.
    15. Salemi, Michael K, 1999. "Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-25, Jan.-Feb..
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