This paper challenges what is the standard account of UK unemployment, namely that the major swings in unemployment over the past 25 years are due predominantly to movements in the underlying empirical "natural rate of unemployment" (NRU). Our analysis suggests that the British NRU has remained reasonable stable through time and that the medium-run swings in unemployment are due, instead, to very prolonged after-effects of persistent (transitory but long-lasting) shocks. We argue that (a) past UK labour market shocks have prolonged after-effects on unemployment due to interactions among different lagged adjustment processes in the labour market, (b) many of the important shocks that have hit the UK labour market over the past 25 years have been persistent, and (c) the persistence of the shocks is complementary to the persistence of the lagged adjustment processes in generating movements of UK unemployment.
We show that there is a difficulty in the original Goodwin model which is also found in some more recent applications. In it both the labour share and the proportion employed can exceed unity, properties which are untenable. However, we show that the underlying dynamic structure of the model can be reformulated to ensure that these variables cannot exceed unity. An illustrative example extends the original model, and we argue it is both plausible and satisfies the necessary unit box restrictions. r 2005 Elsevier B.V. All rights reserved.JEL classification: E32
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