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The macroeconomics of the labor market: Three fundamental views

  • Marika Karanassou

    ()

    (Department of Economics, Queen Mary, University of London and IZA)

  • Hèctor Sala

    ()

    (Grup d'Anàlisi Econòmica Aplicada (GEAP) i IZA, Departament d'Economia Aplicada, Universitat Autònoma de Barcelona)

  • Dennis J. Snower

    ()

    (President 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 short-run 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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File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/CREAP2006-15.pdf
File Function: First version, 2006
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File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/CREAP2006-15.pdf
File Function: Revised version, 2006
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Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number CREAP2006-15.

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Length: 36 pages
Date of creation: Dec 2006
Date of revision: Dec 2006
Handle: RePEc:xrp:wpaper:creap2006-15
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  1. Karanassou, Marika & Sala, Héctor & Snower, Dennis J., 2003. "Unemployment in the European Union: A dynamic reappraisal," Open Access Publications from Kiel Institute for the World Economy 2933, Kiel Institute for the World Economy (IfW).
  2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Bande, Roberto & Karanassou, Marika, 2007. "Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain 1980-1995," IZA Discussion Papers 2593, Institute for the Study of Labor (IZA).
  4. Marika Karanassou & Dennis J. Snower, 2004. "Unemployment Invariance," German Economic Review, Verein für Socialpolitik, vol. 5(3), pages 297-317, 08.
  5. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
  6. 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.
  7. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  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. 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).
  10. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, vol. 10(03), pages 285-316, June.
  11. Karanassou, Marika & Snower, Dennis J., 1996. "Is the Natural Rate a Reference Point?," CEPR Discussion Papers 1507, C.E.P.R. Discussion Papers.
  12. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  13. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 5-59, 01.
  14. 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.
  15. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2003. "Unemployment in the European Union: Institutions, Prices, and Growth," IZA Discussion Papers 899, Institute for the Study of Labor (IZA).
  16. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  17. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
  18. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
  19. 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.
  20. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  21. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  22. Karanassou, Marika & Snower, Dennis J., 1993. "Explaining Disparities in Unemployment Dynamics," CEPR Discussion Papers 858, C.E.P.R. Discussion Papers.
  23. Layard, R. & Bean, C., 1988. "Why Does Unemployment Persist?," Papers 321, London School of Economics - Centre for Labour Economics.
  24. 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.
  25. 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.
  26. Martin Flodén, 2006. "Labour Supply and Saving Under Uncertainty," Economic Journal, Royal Economic Society, vol. 116(513), pages 721-737, 07.
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