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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 Autònoma 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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