Growth, unemployment and heterogeneity

Abstract

The paper analyzes unemployment in a medium-run growth model, where aggregate demand and supply interact. On one hand, autonomous demand drives the dynamics of the system, while heterogeneity in the consumption function, due to the presence of unemployment, strengthens the links with supply aspects. On the other hand, both the rate of growth of labor productivity and labor supply are endogenous. Two major results are obtained. First, unemployment allows the reconciliation between aggregate demand and supply. The second is that unemployment remains bounded and this means that the interaction between aggregate demand and supply thwarts instability. These results are in keeping with those obtained by means of a bottom-up approach, typical of agent based models (ABM). Possible explanations and implications of this convergence are put forward. the study of a nonlinear system where both aggregate demand and supply are endogenous and generate a bounded unemployment, followed by a methodological effort direct to identify possible lines of convergence with the AMB approach. This is a by-product of the presence of heterogeneity in our model.

Autonomous demand, multiple equilibria and unemployment dynamics

“…The third group only includes α , which refers to expectations, which stabilizes the system. Even though the present specification of the expectation function may raise perplexities, Ferri et al ( 2019 ) have shown how the dynamics of the model is robust to changes in the specification of expectations, above all those based upon some form of learning.…”

“…At the same time, there is uncertainty because the driver cannot work forever. These properties are incorporated in the present model, which is based on the same set up of Fazzari et al ( 2020 ) and by Ferri et al ( 2019 ) except for the consumption function, where its two components (see 3.2 and 3.5 below) are specified in a different way. In fact, the durable consumption function not only maintains the dependence on an exogenous rate of growth ( g *), but it also depends, cyclically and nonlinearly, on the rate of unemployment.…”

“…Equation ( 3.1 ) supposes that expectations of the rate of growth ( g t ) are formed according to an adaptive rule (see Ferri et al 2019 , for more sophisticated formulae based upon learning). Equations ( 3.2 ) and ( 3.5 ) represent consumption in non-durable and durable goods, respectively.…”

“…Unemployment remains bounded, while the reconciliation process between actual growth and the natural one takes place. Ferri et al ( 2019 ) have enriched the model by taking into account a further feedback from unemployment to aggregate demand by considering heterogeneous consumers (see also Kaplan and Violante 2018 ), along with learning agents. In this environment, the dynamics between aggregate demand and supply become more interdependent and the instability process more complex (see also Ferri 2019 ).…”

Nonlinear models of the Phillips curve

“…As shown by Ferri et al (2001), the regime-switching approach is capable of tempering accelerations in the dynamics with the overall stability of the system and in so doing it can generate endogenous cycles along with Phillips curves of different shapes. The model is a stylized medium-run growth model compatible with structural changes in evolving economies; moreover, it accounts for the role of monetary policy and the interaction between aggregate demand and supply (Fazzari et al 2020;Ferri et al 2019).…”