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Vicious and Virtuous Circles: The Political Economy of Unemployment

Author

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  • Ruthira Naraidoo

    () (Keele University, Centre for Economic Research and School of Economic and Management Studies)

  • Patrick Minford

    () (Cardiff Business School, Aberconway Building, Cardiff University)

Abstract

We develop a theoretical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The theory here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks and the institutional structure of the economy; the channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate of unemployment react to shocks by demanding more or less social protection. The reduced form results from a dozen OECD economies give support to the model and further evidence is obtained by structural estimates for the UK.

Suggested Citation

  • Ruthira Naraidoo & Patrick Minford, 2006. "Vicious and Virtuous Circles: The Political Economy of Unemployment," Keele Economics Research Papers KERP 2006/03, Centre for Economic Research, Keele University.
  • Handle: RePEc:kee:kerpuk:2006/03
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0603.pdf
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    References listed on IDEAS

    as
    1. Corso, Phaedra S & Hammitt, James K & Graham, John D, 2001. "Valuing Mortality-Risk Reduction: Using Visual Aids to Improve the Validity of Contingent Valuation," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 165-184, September.
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    3. Fredrik Carlsson & Olof Johansson-Stenman & Peter Martinsson, 2004. "Is Transport Safety More Valuable in the Air?," Journal of Risk and Uncertainty, Springer, vol. 28(2), pages 147-163, March.
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    5. Milton C. Weinstein & Donald S. Shepard & Joseph S. Pliskin, 1980. "The Economic Value of Changing Mortality Probabilities: A Decision-Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 373-396.
    6. repec:reg:rpubli:282 is not listed on IDEAS
    7. Viscusi, W Kip, 1989. "Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-263, September.
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    Cited by:

    1. Matthews, Kent & Minford, Patrick & Naraidoo, Ruthira, 2008. "Vicious and virtuous circles -- The political economy of unemployment in interwar UK and USA," European Journal of Political Economy, Elsevier, pages 605-614.
    2. Naveen Srinivasan & Pratik Mitra, 2014. "The European unemployment problem: its cause and cure," Empirical Economics, Springer, vol. 47(1), pages 57-73, August.
    3. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
    4. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.

    More about this item

    Keywords

    Equilibrium unemployment; political economy; vicious and virtuous circles; bootstrapping;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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