Unemployment Equilibria and Input Prices: Theory and Evidence from the United States
The paper develops an efficiency-wage model, where input prices affect the equilibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of US joblessness. The equations do well in forecasting unemployment many years out-of-sample, and provide evidence that the oil-price spike associated with Iraq's invasion of Kuwait appears to be a component of the "mystery" recession which followed.
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