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Vicious and virtuous circles--The political economy of unemployment

  • Patrick Minford

    ()

    (Cardiff Business School, Aberconway Building, Cardiff University, Colum Drive, Cardiff, Wales, United Kingdom, CF 10 3EU)

  • Ruthira Naraidoo

    ()

    (Department of Economics, University of Pretoria)

We develop an empirical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The model 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 prediction of a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks and the model specification is superior in forecasting performance out of sample to alternative models of `generalised hysteresis'.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200914.

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Length: 26 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:pre:wpaper:200914
Contact details of provider: Postal: PRETORIA, 0002
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://www.up.ac.za/economics

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