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The Macroeconomics of the Labor Market: Three Fundamental Views

  • Marika Karanassou

    ()

    (Queen Mary, University of London and IZA)

  • Hector Sala

    ()

    (Universitat Aut�noma de Barcelona and IZA)

  • Dennis J. Snower

    ()

    (Institute for World Economics, University of Kiel, CEPR and IZA)

We distinguish and assess three fundamental views of the labor market regarding the movements in unempoyment: (i) the frictionless equilibrium view; (ii) the chain reaction theory, or prolonged adjustment view; and (iii) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the shortrun fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long runs are interrelated, merging with one another along an intertemporal continuum.

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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 585.

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Date of creation: Feb 2007
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Handle: RePEc:qmw:qmwecw:wp585
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  1. Layard, R. & Bean, C., 1988. "Why Does Unemployment Persist?," Papers 321, London School of Economics - Centre for Labour Economics.
  2. Marika Karanassou & Hector Sala & Dennis Snower, 2004. "Unemployment in the European Union: Institutions, Prices, and Growth," CESifo Working Paper Series 1247, CESifo Group Munich.
  3. Snower, Dennis J. & Karanassou, Marika & Henry, Brian, 1999. "Adjustment Dynamics and the Natural Rate: An Account of UK Unemployment," IZA Discussion Papers 75, Institute for the Study of Labor (IZA).
  4. Karanassou, Marika & Snower, Dennis J., 1998. "How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory," CEPR Discussion Papers 1826, C.E.P.R. Discussion Papers.
  5. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  6. Roberto Bande & Marika Karanassou, 2006. "Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain (1980-1995)," ERSA conference papers ersa06p53, European Regional Science Association.
  7. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
  8. Lindbeck, Assar, 1994. "The Welfare State and the Employment Problem," American Economic Review, American Economic Association, vol. 84(2), pages 71-75, May.
  9. Marika Karanassou & Dennis J. Snower, 2004. "Unemployment Invariance," German Economic Review, Verein für Socialpolitik, vol. 5(3), pages 297-317, 08.
  10. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," IZA Discussion Papers 2265, Institute for the Study of Labor (IZA).
  11. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2004. "Unemployment, Growth and Fiscal Policy: New Insights on the Hysteresis Hypothesis," IZA Discussion Papers 1127, Institute for the Study of Labor (IZA).
  12. Martin Flodén, 2006. "Labour Supply and Saving Under Uncertainty," Economic Journal, Royal Economic Society, vol. 116(513), pages 721-737, 07.
  13. Marika Karanassou & Dennis Snower, 1996. "Is the Natural Rate a Reference Point?," Archive Discussion Papers 9623, Birkbeck, Department of Economics, Mathematics & Statistics.
  14. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 5-59, 01.
  15. Heikki Kauppi & Erkki Koskela & Rune Stenbacka, 2004. "Equilibrium Unemployment and Capital Intensity Under Product and Labor Market Imperfections," CESifo Working Paper Series 1343, CESifo Group Munich.
  16. Marika Karanassou & Hector Sala & Dennis J. Snower, 2002. "Unemployment in the European Union: A Dynamic Reappraisal," Working Papers 480, Queen Mary University of London, School of Economics and Finance.
  17. Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series WP-00-2, Federal Reserve Bank of Chicago.
  18. Berndt, Ernst R. & Fuss, Melvyn A., 1986. "Productivity measurement with adjustments for variations in capacity utilization and other forms of temporary equilibrium," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 7-29.
  19. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  20. Karanassou, Marika & Snower, Dennis J., 1993. "Explaining Disparities in Unemployment Dynamics," CEPR Discussion Papers 858, C.E.P.R. Discussion Papers.
  21. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
  22. Lindbeck, Assar & Snower, Dennis J, 1988. "Cooperation, Harassment, and Involuntary Unemployment: An Insider-Outsider Approach," American Economic Review, American Economic Association, vol. 78(1), pages 167-88, March.
  23. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  24. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  25. Lindbeck, Assar & Snower, Dennis J, 1987. "Strike and Lock-Out Threats and Fiscal Policy," Oxford Economic Papers, Oxford University Press, vol. 39(4), pages 760-84, December.
  26. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
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