Working Paper: NBER ID: w2698
Authors: Olivier Jean Blanchard
Abstract: This paper analyzes the issue of persistent high unemployment. It focuses on two channels of persistence. The first is capital accumulation. The paper analyzes investment decisions under imperfect competition, focusing in particular on the effects of demand and cost shocks on investment, capital composition and bankruptcies, and their effect on employment and unemployment. The second is labor supply. The paper analyzes the various channels through which the unemployed may become disenfranchised, leading to higher equilibrium unemployment. In both cases, it briefly reviews and assesses the available empirical evidence. It ends by drawing several implications.
Keywords: unemployment; capital accumulation; labor supply; economic fluctuations
JEL Codes: E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prolonged unemployment (J64) | capital decumulation (E21) |
| capital decumulation (E21) | increase equilibrium unemployment (J64) |
| prolonged unemployment (J64) | increase equilibrium unemployment (J64) |
| long-term unemployment (J64) | alters labor market dynamics (J29) |
| alters labor market dynamics (J29) | reduces bargaining power of the unemployed (J68) |
| reduces bargaining power of the unemployed (J68) | increase equilibrium unemployment (J64) |
| demand and cost shocks (E39) | affect capital composition (E22) |
| affect capital composition (E22) | impact employment levels (F66) |
| labor supply changes (J20) | impact wage setting (J31) |