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Vicious and Virtuous Circles - the Political Economy of Unemployment in Interwar UK and USA

  • Ruthira Naraidoo

    ()

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

  • Patrick Minford

    ()

    (Cardiff Business School, Aberconway Building, Cardiff University)

  • Kent Matthews

    ()

    (Cardiff Business School, Aberconway Building, Cardiff University)

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) 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 react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0608.pdf
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/08.

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Length: 37 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:kee:kerpuk:2006/08
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Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom

Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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  36. repec:spo:wpecon:info:hdl:2441/5571 is not listed on IDEAS
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