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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.xreap.cat/RePEc/xrp/pdf/CREAP2006-15.pdf
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File URL: http://www.xreap.cat/RePEc/xrp/pdf/CREAP2006-15.pdf
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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. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc.
  2. 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.
  3. Marika Karanassou & Hector Sala & Dennis J. Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Discussion Papers 2008-08, School of Economics, The University of New South Wales.
  4. Roberto Bande & Marika Karanassou, 2006. "Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain (1980-1995)," ERSA conference papers ersa06p53, European Regional Science Association.
  5. Marika Karanassou & Hector Sala & Dennis J. Snower, 2003. "Unemployment in the European Union: Institutions, Prices, and Growth," Working Papers 493, Queen Mary University of London, School of Economics and Finance.
  6. 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.
  7. Marika Karanassou & Dennis J. Snower, 2004. "Unemployment Invariance," German Economic Review, Verein für Socialpolitik, vol. 5(3), pages 297-317, 08.
  8. 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).
  9. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  10. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  11. 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.
  12. Lindbeck, Assar, 1994. "The Welfare State and the Employment Problem," American Economic Review, American Economic Association, vol. 84(2), pages 71-75, May.
  13. Sujit Kapadia, 2003. "The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective," Economics Series Working Papers 181, University of Oxford, Department of Economics.
  14. Karanassou, Marika & Snower, Dennis J., 1997. "Is the natural rate a reference point?," European Economic Review, Elsevier, vol. 41(3-5), pages 559-569, April.
  15. Floden, Martin, 2005. "Labor Supply and Saving under Uncertainty," SSE/EFI Working Paper Series in Economics and Finance 597, Stockholm School of Economics.
  16. 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).
  17. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
  18. 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.
  19. Karanassou, Marika & Snower, Dennis J., 1993. "Explaining Disparities in Unemployment Dynamics," CEPR Discussion Papers 858, C.E.P.R. Discussion Papers.
  20. 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.
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  24. 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.
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