Working Paper: CEPR ID: DP3618
Authors: Patrick Minford; Ruthira Naraidoo
Abstract: We develop a theoretical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The theory here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks (mainly demand-management in nature) and the institutional structure of the economy; the channel through which these two forces feed on each other is a political economy process whereby voters react to shocks by demanding more or less social protection. The results from a dozen OECD economies appear to confirm a pattern of unemployment behaviour in which unemployment moves with nonlinear dynamics between high and low equilibria in response to shocks obtained. The policy conclusion is that macroeconomics and supply side policies are intimately linked through political economy and these have the capacity to create both ?vicious? and ?virtuous? circles of economic performance.
Keywords: equilibrium; employment; political economy; vicious and virtuous circles
JEL Codes: E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand shocks (E39) | unemployment (J64) |
| institutional frameworks (D02) | unemployment (J64) |
| demand shocks (E39) | political responses (D72) |
| political responses (D72) | social protection policies (H55) |
| unemployment (J64) | political responses (D72) |
| political responses (D72) | unemployment (J64) |
| unemployment (J64) | social protection policies (H55) |