Adjustment dynamics and the natural rate: an account of UK unemployment

Abstract

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.

Institutions, capital stock and wage setting in Spain

“…The alternative way of looking at the association between wages and unemployment benefits is to consider the replacement rate (figures 1c and 1d). The picture in this case is somewhat different: the replacement rate rose in the first part of the 1980s and remained stable in the interval between the unemployment benefits' reforms of 1992 and 8 The analytical developments of such arguments lie far beyond the scope of this paper and are left for future research. 9 10 This is the proportion of unemployment benefits (averaged over the different types of recipients) of average earnings before tax.…”

“…An alternative to the institutionalist approach is the CRT: 3 it focuses on the importance of the lagged adjustment processes and outlines the central role of the growth drivers in explaining the unemployment trajectory. For example, Henry, Karanassou and Snower (2000) and Snower (2003 and2004) find capital stock to be a crucial determinant of unemployment in the UK and the EU. The empirical methodology of the CRT involves the estimation of multi-equation systems (with a wage setting equation always considered) and yields a salient result: the influence of the growth drivers is found to overcome the importance of wage pressure factors in To confront these two views, the Spanish wage setting curve is estimated to test: (i) to what extent the 'usual suspects' from the institutionalist view are relevant in a dynamic framework; and (ii) the relevance of a growth driver such as the ratio of public to private capital.…”

Unemployment dynamics in Uruguay: An analysis using chain reaction theory

“…For a review, see Karanassou (1998), Karanassou and Snower (1997 and Henry, Karanassou and Snower (2000), among others. 3 The theoretical underpinnings for the specification of each equation are set out in Karanassou and Snower (2000).…”

The macroeconomics of the labor market: three fundamental views

“…In the context of autoregressive multi-equation models, movements in unemployment can be viewed as "chain reactions" of responses to labor market shockshence the epithet 'Chain Reaction Theory'of this approach -working their way through systems of interacting lagged adjustment processes. 10 These labor market frictions make current decision variables of labor market participants depend both on past and future labor market conditions. In the simple model below we focus on the role of training costs.…”