Unemployment Equilibria and Input Prices: Theory and Evidence from the United States

Abstract

JEL classification codes E24, E32This paper develops an efficiency-wage model where input prices affect the equilibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S.joblessness. The equations do well in forecasting unemployment many years out-of-sample, and provide evidence that the oil-price spike associated with Iraq's invasion of Kuwait appears to be a component of the "mystery" recession which followed.

Unemployment, Well-Being, and Wage Curves in Eastern and Central Europe

“…Movements in oil prices appear to cause cyclical changes in unemployment in the United States and Europe but seem unable to explain the upward trend in European unemployment. Carruth et al (1995Carruth et al ( , 1998 find that oil prices help to explain unemployment in the United Kingdom and Canada and the United States, respectively.…”

The impact of supply shocks on unemployment in Spain

“…Both rises and falls in the price of oil have a long-run effect on the equilibrium unemployment rate, as predicted by Carruth et al (1998), and the effects are of a very similar magnitude. This may be a sign that the magnitude of the effect on the equilibrium rate of unemployment of a rise in the price of oil is similar to that of a fall.…”

“…Here we use the model developed by Carruth et al (1998), who established that the link between oil prices and unemployment in equilibrium comes from the efficiency-wage framework. In a nutshell, an increase in the oil price increases the cost of production.…”

“…This is so since oil price shocks may affect the unemployment rate in equilibrium, as established by Hamilton (1983Hamilton ( , 1988 and Carruth et al (1998). In this paper we focus on the effect of positive and negative supply shocks on the unemployment rate in Spain rather than on GDP per capita or growth in GDP for two reasons; first, as established by Okun (1962), not all changes in GDP are transmitted to job creation or destruction.…”

“…We also distinguish between the effect on the unemployment rate and the equilibrium unemployment rate proxied by the Hodrick-Prescott filter, as in the Carruth et al (1998) model.…”