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The political economy of unemployment and threshold effects. A nonlinear time series approach

Author

Listed:
  • Ruthira Naraidoo

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

  • Patrick Minford

    (Cardiff Business School, Aberconway Building, Cardiff University)

  • Ioannis A. Venetis

    (University of Patras, Department of Economics)

Abstract

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment using a nonlinear threshold model for a number of OECD countries. The theory here sees the natural rate and the associated 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 empirical results obtained confirm the existence of multiple and ``moving'' equilibria (``vicious'' and ``virtuous'' circles). The nonlinear model is compared with a linear version with the nonlinear framework always exhibiting superior in-sample fit and generally better out-of-sample predictive accuracy. The conclusion is that macroeconomics and supply side policies feed on each other via the political economy.

Suggested Citation

  • Ruthira Naraidoo & Patrick Minford & Ioannis A. Venetis, 2006. "The political economy of unemployment and threshold effects. A nonlinear time series approach," Keele Economics Research Papers KERP 2006/21, Centre for Economic Research, Keele University.
    • Handle: RePEc:kee:kerpuk:2006/21
    Note: The authors would like to thank James Davidson, Costas Milas, David Peele, Ivan Paya and workshop participants for helpful comments.
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    More about this item

    Keywords

    Equilibrium unemployment; political economy; threshold model; forecasting;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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