Working Paper: NBER ID: w1950
Authors: Olivier J. Blanchard; Lawrence H. Summers
Abstract: European unemployment has been steadily increasing for the last 15 years and is \nexpected to remain very high for many years to come. In this paper, we argue that \nthis fact implies that shocks have much more persistent effects on unemployment than \nstandard theories can possibly explain. We develop a theory which can explain such \npersistence, and which is based on the distinction between insiders and outsiders in \nwage bargaining. We argue that if wages are largely set by bargaining between \ninsiders and firms, shocks which affect actual unemployment tend also to affect \nequilibrium unemployment. We then confront the theory to both the detailed facts of \nthe European situation as well as to earlier periods of high persistent unemployment \nsuch as the Great Depression in the US.
Keywords: Unemployment; Hysteresis; Labor Economics; Wage Bargaining
JEL Codes: E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| actual unemployment (J64) | equilibrium unemployment (J64) |
| past unemployment levels (J64) | current unemployment rates (J64) |
| shocks that reduce employment (J63) | number of insiders (G34) |
| number of insiders (G34) | future wage setting (J31) |
| future wage setting (J31) | employment levels (J23) |
| actual unemployment (J64) | wage-setting behavior (J31) |
| wage-setting behavior (J31) | high unemployment (J64) |