Working Paper: CEPR ID: DP540
Authors: Alan Manning
Abstract: This paper constructs a simple, imperfectly competitive macro model which may have single or multiple equilibria depending on whether there are constant or increasing returns to scale in production. The model can be estimated and so can be used not only to test multiple versus single equilibrium models, but also to test whether multiple equilibrium models are capable of explaining the observed behaviour of unemployment. The model is estimated for the British economy for the period 1951-87. Some evidence for multiple equilibria is found and using such a model suggests that the rise in unemployment in Britain in the 1980s is best understood as a move from a low- to a high-equilibrium unemployment rate. Although the multiple equilibrium model does perform better than a single equilibrium model, however, the difference is not very significant so that there must remain considerable uncertainty about this issue.
Keywords: unemployment; multiple equilibria; imperfect competition
JEL Codes: 023; 824
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rise in unemployment during the 1980s in Britain (E65) | transition from a low to a high equilibrium unemployment rate (J64) |
| increasing returns to scale in production (E23) | existence of multiple equilibria (C62) |
| economy's response to exogenous shocks (F41) | type of equilibrium state (C62) |
| reducing union power (J58) | lower equilibrium unemployment (J64) |
| reducing union power (J58) | exacerbate unemployment issues (J64) |