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Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?

  • Jean-Paul Fitoussi


  • David Jestaz

    (Alliance Program)

  • Edmund S Phelps

    (Center on Capitalism and Society)

  • Gylfi Zoega

    (Department of Economics, Mathematics and Statistics)

It is widely agreed that the natural unemployment rate recovered strongly in several OECD economies in the 1990s while not yet in the others. This paper draws on models by the authors endogenizing the path of the natural rate in order to trace the causes and apportion the credit. The results suggest that the five structural reforms of the labor market urged by the OECD Secretariat were effective and account for some of the recovery where adopted. However, the paper sees most of the recoveries as largely the emergence from structural slump to a structural boom--a boom brought by revived investment in employees, customers and fixed capital. Behind this revival is a recovery of business-asset valuations resulting from improved expectations for productivity growth and, judging by the stock market, hopes for a future lift in business earnings that exceeds extrapolations of the past--both driven by the "new economy."

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/5571.

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Date of creation: 2000
Date of revision:
Publication status: Published in Brookings Papers on Economic Activity, 2000, pp.237-311
Handle: RePEc:spo:wpmain:info:hdl:2441/5571
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  1. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
  2. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
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  7. Phelps, Edmund S & Zoega, Gylfi, 1997. "The Rise and Downward Trend of the Natural Rate," American Economic Review, American Economic Association, vol. 87(2), pages 283-89, May.
  8. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  9. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S121-69, Supplemen.
  10. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
  11. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
  12. Assar Lindbeck & Dennis J. Snower, 1989. "The Insider-Outsider Theory of Employment and Unemployment," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262074x, June.
  13. Madsen, Jakob B, 1998. "General Equilibrium Macroeconomic Models of Unemployment: Can They Explain the Unemployment Path in the OECD?," Economic Journal, Royal Economic Society, vol. 108(448), pages 850-67, May.
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