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Unemployment and Productivity in the Long Run; the Role of Macroeconomic Volatility

Author

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  • Paolo Surico
  • Luca A Ricci
  • Pierpaolo Benigno

Abstract

We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.

Suggested Citation

  • Paolo Surico & Luca A Ricci & Pierpaolo Benigno, 2010. "Unemployment and Productivity in the Long Run; the Role of Macroeconomic Volatility," IMF Working Papers 10/259, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/259
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    References listed on IDEAS

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    4. P. Du Caju & C. Fuss & L. Wintr, 2012. "Sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 45(1), pages 7-22, March.
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    6. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-128, February.
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    8. Tim W. Cogley, 2003. "Drifts and Volatilities: Monetary Policies and Outcomes in the Post War U.S," Working Papers 35, University of California, Davis, Department of Economics.
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    12. Fagan, Gabriel & Messina, Julián, 2009. "Downward wage rigidity and optimal steady-state inflation," Working Paper Series 1048, European Central Bank.
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    Cited by:

    1. Abi Morshed, Alaa & Andreou, E. & Boldea, Otilia, 2016. "Structural Break Tests Robust to Regression Misspecification," Discussion Paper 2016-019, Tilburg University, Center for Economic Research.
    2. Barbara Annicchiarico & Alessandra Pelloni, 2014. "Productivity growth and volatility: how important are wage and price rigidities?," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 306-324, January.
    3. Tommaso Ferraresi & Andrea Roventini & Willi Semmler, 2016. "Macroeconomic regimes, technological shocks and employment dynamics," Documents de Travail de l'OFCE 2016-19, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Raurich, Xavier & Sorolla, Valeri, 2014. "Growth, unemployment and wage inertia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 42-59.
    5. Kargı, Bilal, 2014. "The Data of Labor Market in Turkey and Time Series Analysis on Economic Growth (2000:01-2013:03)," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 98-102.
    6. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
    7. Antonio Ribba, 2017. "What Drives US Inflation and Unemployment in the Long Run?," Economics Bulletin, AccessEcon, vol. 37(2), pages 765-777.
    8. Stefano, Fasani, 2016. "Long-run Unemployment and Macroeconomic Volatility," Working Papers 352, University of Milano-Bicocca, Department of Economics, revised 18 Oct 2016.
    9. Aurelijus Dabušinskas & Dmitry Kulikov & Martti Randveer, 2013. "The impact of volatility on economic growth," Bank of Estonia Working Papers wp2012-7, Bank of Estonia, revised 04 Feb 2013.
    10. Giraitis, L. & Kapetanios, G. & Yates, T., 2014. "Inference on stochastic time-varying coefficient models," Journal of Econometrics, Elsevier, vol. 179(1), pages 46-65.
    11. Luigi Bocola & Nils Gornemann, 2013. "Risk, economic growth and the value of U.S. corporations," Working Papers 13-10, Federal Reserve Bank of Philadelphia.
    12. Antoine Lepetit, 2018. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-offs," Working Papers hal-01536416, HAL.
    13. Antonio Ribba, 2016. "Productivity Growth Shocks and Unemployment in the Postwar US Economy," Department of Economics 0077, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

    More about this item

    Keywords

    Business cycles; Economic models; Labor markets; Productivity; United States; Wages; Wage adjustments; Time series; Unemployment; macroeconomic volatility; downward wage rigidities; unemployment rate; employment; unemployment rates; rate of unemployment; Macroeconomics and Monetary Economics: General; Macroeconomics: Consumption; Saving; Production; and Investment: General (includes Measurement and Data); Money and Interest Rates: General;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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