Studies in Medium-Run Macroeconomics: Growth, Fluctuations, Unemployment, Inequality and Policies
Chenery, H. Overcapacity and the acceleration principle. Econometrica: Journal of the Econometric Society , 1— Chirinko, R. Business fixed investment spending: modelling strategies, empirical results and policy implications. Journal of Economic Literature , 31 4 pp. Corrado, C. Capacity utilization. Cushman, D. Cynamon B. Diebold, F. Long memory and persistence in aggregate output. Journal of Monetary Economics, Vol. Duval, R. Fazzari S. Ford, R. Freitas, F. Growth rate and level effects, the stability of the adjustment of capacity to demand and the Sraffian supermultiplier. Review of Political Economy , January.
Gali, J. The American Economic Review , Vol. Garegnani, P. Il problema della domanda effettiva nello sviluppo economico italiano. Svimez, Rome. Review of Political Economy.
Girardi, D. Old and new formulations of the neoclassical theory of aggregate investment: a critical review. Girardi D. Pariboni Autonomous demand and the Investment Share, preliminary draft presented at Storep conference, June. Gordon, R. Is there a trade-off between unemployment and productivity growth? Guajardo, J. Expansionary austerity? International evidence.
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Haltmaier, J. Do recessions affect potential output? International Finance Discussion Papers no Estimation and inference of impulse responses by local projections. The American Economic Review The time for austerity: estimating the average treatment effect of fiscal policy. The Time for Austerity: Estimating the average treatment effect of fiscal policy. The Economic Journal, vol , February, pp. Khotari, S. The Behaviour of Aggregate Corporate Investment. Krugman, P. Past and prospective causes of high unemployment. Lavoie, M.
Levrero, E. Sraffa and the reconstruction of economic theory , vol 2: Aggregate demand, policy analysis and growth , Basingstoke: Palgrave- Macmillan. Lindbeck, A. Wage setting, unemployment and insider-outsider relations. Martin, R. Potential output and recessions: are we fooling ourselves? Nelson, C.
Studies in medium-run macroeconomics : growth, fluctuations, unemployment, inequality and policies
Trends and random walks in macroeconmic time series: some evidence and implications. Is aggregate demand wage led or profit led? National and global effects. Reifschneider, D. Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. This also pushes wages up along the wage-setting curve. This process will continue until the wage is sufficiently high that firms stop expanding or entering the economy, that is until the economy reaches point B, the new Nash equilibrium. Effects of technological improvements on the labour market model: Short and long run.
Comparing the new Nash equilibrium at point B with the initial one at point A, both workers and employers benefit from the new technology. The wage share is back at its initial level and inequality is lower at B because the unemployment rate is lower. Note that although the wage share at B is no higher than at A, real wages are higher. To see the effect on inequality, we will represent the initial situation by a Lorenz curve introduced in Unit 5 and used also in Units 9 and 10 , and then see how its shape changes. The solid line in Figure When unemployment increases to D on the horizontal axis , the Lorenz curve shifts out to the dashed one.
The kink is lower, reflecting the lower wage share at point D. In the long run, unemployment falls to B and the wage share returns to its initial level. The Lorenz curve shifts inwards. The economy starts in long-run equilibrium before the new technology, with a share A of the population being unemployed corresponding to point A in Figure This displaces some workers from their jobs so that unemployment now increases to D corresponding to point D in Figure We assume that wages remain the same for the remaining workers, so since output per worker has risen, wages as a share of output declines.
New firms will be attracted to the economy and investment will rise, so existing firms will expand. Unemployment eventually falls to the level shown by point B, the new long-run equilibrium. The Einstein in Unit 9 showed that the Gini coefficient g can be calculated from the three groups of people in the economy-wide labour market as follows:. The long run is a misleading guide to current affairs. In the long run we are all dead.
Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. A Tract on Monetary Reform Keynes advocated what we have earlier termed a dynamic view of the economy, that is, one that focuses on changes. In Section When something changes like a new technology , economists compare the equilibrium before and after the change. This is termed the comparative static approach static means unchanging, so the idea is to compare two things that are different—the before and after—but are themselves static.
Varian is right: it is important to know what happens in equilibrium and how the level of employment, wages, and profits that occur in equilibrium will differ depending on conditions and policies adopted. And we know from Unit 4 that people do care about the wellbeing of others, so the long run matters even if it is very long.
If when things change, the economy moves quickly from one equilibrium to another, the comparative static approach advocated by Varian makes sense. In Unit 11 we explained that when a market is not in equilibrium, there are opportunities for economic actors to benefit by changing the price or quantity they are selling or buying. These so-called rent-seeking activities are part of the process by which a new equilibrium is established.
In a fish market, for example, rent seeking just means offering or charging a different price, and the process of getting to a new equilibrium is relatively quick. Kathryn Graddy: Fishing for perfect competition. But in the labour market, if competition from other firms has reduced the demand for the good you are producing and put you out of work, the process is going to be slower. The reason is that the rent seeking that may bring about a new equilibrium may involve you retraining to develop a new set of skills, or you may have to uproot your family and seek work in a new location.
Around the turn of the current century after more than a decade of rapidly rising imports from China, there was a consensus among US economists that imports were not having any major negative effect on wages or employment, in part because workers producing goods competing with imports could easily relocate to other regions.
Yet evidence was accumulating even then that the adjustment of the US economy to the China shock was not going to be a simple textbook comparative static jump from one equilibrium to another. The impact on US labour markets was geographically concentrated: parts of the state of Tennessee specializing in furniture production and facing competition from China were hard hit, while nearby Alabama specializing in heavy industry was barely affected since China did not export heavy industrial goods.
The geographical concentration of the effects of the China shock has allowed economists to study how labour markets adjusted. They found that in US labour markets, the long run is a very long time. Very few left the region. Localities hit by import competition in the s continued to be depressed into the second decade of this century. Between and , the China shock led to a loss of 2.
The conclusion of a major study of the China shock sounded more like Keynes than Varian. If one had to project the impact for the US labour market with nothing to go on other than a standard undergraduate economics textbook, one would predict large movements of workers between US tradable industries meaning, exporting or competing with imports , for example, from apparel and furniture to pharmaceuticals and jet aircraft. You would also expect limited reallocation of jobs from tradables to non-tradables, and no net impacts on US aggregate employment. The reality of adjustment to the China trade shock has been very different.
Adjustment to the introduction of labour-saving machinery, which we have studied in this unit, is likely to be similarly slow. In Unit 18 we return to China in the world economy, and show that the response to the China shock in Germany was quite different. The answer matters because citizens who vote for parties with alternative economic programs, and policymakers who attempt to improve those programs, will need some concept of what is desirable—either for the individual, the policymaker, or the nation.
As we saw in Unit 3, people value their free time as well as their access to goods. We should include their reward per hour of work in our evaluation of outcomes. There are of course other dimensions of long-run economic performance that most people care about. But here we focus solely on the growth in real wages per hour and the unemployment rate. We use the labour market model and the Beveridge curve to see that achieving good performance requires an economy to have two capacities:.
Technological change means jobs disappearing in firms in which new technology substitutes for workers. Jobs also disappear as new firms enter and those unable to adapt to the new conditions shut down. The Beveridge curve highlights the importance of matching workers and vacancies in the labour market. It uses the criteria of real wage growth and unemployment rates. We study a long period because we do not want our evaluation of long-term performance to be affected by the particular phase of the business cycle in which a country finds itself it will look much better at the peak than at the trough.
We use wages in manufacturing because they are measured in ways that are more accurately comparable across nations—although this is not ideal, because the share of employment in manufacturing shrinks over time and varies across countries. Good performance places a country in the top-left corner of Figure Since we value both high wage growth and low unemployment, we may be prepared to tolerate low wage growth if it is associated with a lower level of unemployment. If you look at Figure Spanish real wage growth for — has therefore been estimated using Tables The two rays in Figure The high performers over the year period from to are Norway and Japan.
This meant that other nations could learn from it, rapidly raising their productivity. Similar arguments apply to Canada. For this reason we do not take these two countries as representative of the low performers, although real wages have grown much more slowly than productivity in the US, so most US citizens did not benefit very much from economic growth in this period. Notice that successful countries used different combinations of policies and institutions.
Some of the best performers on steeper rays from the origin like Norway, Finland, Sweden, and Germany have powerful unions, while the Nordic countries including Denmark have some of the most generous unemployment benefits in the world. The differences between Japan and Norway on one hand, and Italy and Spain on the other, centre on unemployment rather than real wage growth.
Unemployment rates of two high and two low labour market performers — Data from — David R. We shall see that the model in this unit provides a useful framework for understanding the high and low performers of the labour market. We will now show how to use the model to explain the way that institutions and policies affect real wage growth and unemployment in the long run. Refer to Figure The following graph plots the real wage growth of different countries against their unemployment rate, averaged over the period — Policies and institutions make a difference.
The models shed light on the experience of some of the best and worst performers. We take three countries as examples: Norway and Japan as good performers, and Spain as a poor performer. In Norway and Spain, unions are important, but not in Japan. In Norway, more than half of all wage and salary workers are trade union members, and union wage deals affect most workers in the economy.
In Spain, although union wage deals are important for the entire economy, less than one-fifth of Spanish workers are in unions. Union wage bargaining coverage and unemployment across the OECD — Labour force statistics. Visser, Jelle. On the horizontal axis, we plot the percentage of employees whose wages are determined by union wage deals. As you can see, in some European countries, union wage deals cover almost all employees.
Low unemployment is found in countries extending across the whole range of union strength. Just as the employer does not offer the lowest wage possible, most unions do not seek the highest wage they could win in bargaining. Employers offer wages above the minimum because they cannot control how hard the worker works. A union organized across many firms and sectors will not exploit all the bargaining power it possesses. It knows that large wage gains will lead to:. Unions that act this way are called inclusive trade unions.
Non-inclusive unions may bargain for high wages in their own corner of the economy without regard for the effects on other firms or workers, both employed and unemployed. When unions and businesses act in an inclusive manner there is also more likely to be a positive union voice effect. As discussed in Unit 9, this lowers the disutility of work, helping to push down the wage-setting curve. As workers were quickly redeployed to employment in more productive firms, the main impact was to raise average labour productivity, pushing up the price-setting curve and allowing higher wages.
Inclusive trade unions also support generous income floors and high-quality publicly provided healthcare, occupational retraining, and educational services—all of which reduce the risk to which most individuals are exposed. Both of these attributes are essential for a technologically dynamic society. A result is that workers whose jobs are eliminated for example, by the failure of low-productivity firms under the pressure of centrally bargained uniform wages can find an alternative job more quickly.
The result is a Beveridge curve closer to the origin, superior to both the German and US Beveridge curves shown in Figure It is far inside that of Spain, as we see in Figure An inclusive union knows that the economy has to respect the two major incentive problems of a capitalist economy: providing incentives for workers to work and for employers to invest.
In some cases—for example, in Sweden with its highly centralized trade union federation—trade union leaders knew and persuaded their members that in the long run, pushing down the wage-setting curve will increase employment and will not reduce wages. As a result, the inclusive unions of the Nordic countries Norway, Sweden, Finland, and Denmark set their wage demands in accordance with the productivity of labour.
When it rose they demanded a fair share. They had bargaining power from low unemployment, high membership, and their ability to implement wage agreements across the economy, but they did not use this power to push the wage-setting curve up unless it was warranted by productivity growth. These unions also supported legislation and policies that make working less onerous, shifting downward the wage-setting curve, and further expanding long-run employment.
16.1 Technological progress and living standards
In contrast to the Nordic countries, Japanese unions are weak, but workers are well organized in the large companies. These associations therefore operate in a similar way to the unions in Norway: the impact of wage decisions on the economy as a whole is taken into account when wages are set. Specifically, the corporations deliberately do not compete in hiring workers, so as to avoid raising wages.
Unions protect jobs in Spain, supported by government policy. Wage-setters in Spain are strong enough to wield power, but are not inclusive. Based on the model, we would predict high unemployment in Spain, and low unemployment in Norway and Japan. And that is what we see in the data. The employment-enhancing effects of inclusive trade union and government co-insurance policies may help to explain an apparent anomaly: countries with generous unemployment benefits do not have higher rates of unemployment see Figure Unemployment benefit generosity and unemployment rates across the OECD — The contrast between unemployment rates and benefits in Norway and Italy illustrates the point.
The implication is that countries that are able to implement generous but well-designed unemployment insurance schemes, coordinated with job placement services and other active labour market policies, can achieve low rates of unemployment. The following is a plot of unemployment rate and trade union density for the period — Trade union density is defined as the fraction of employees who are union members.
We have seen that differences in institutions and policies make a big difference for employment and wage growth, and that citizens of Spain might wish to have institutions like those of Japan or a Nordic country. Countries that changed their policies changed their fortunes. Both the UK and the Netherlands suffered sharply increased unemployment rates in the s and early s due to the first and second oil shocks which shifted the price-setting curve down and the increased bargaining power of labour which shifted the wage-setting curve up.
But a change in policy eventually turned the bad news around. In the UK, the unemployment rate fell from Different ways of pushing down the wage-setting curve: The Netherlands and the UK. David R. Both countries turned around their economies and shifted the wage-setting curves down, but they used different institutions and policies:. In the Netherlands, a key component was an agreement in between employers and unions called the Wassenaar Accord. Unions offered wage restraint a downward shift in the wage-setting curve and in exchange, the employers agreed to a reduction in working hours.
The union agreed that the reduction in working hours would not increase labour costs and hence would not shift the price-setting curve down. They were powerful enough that they could ensure their members stuck to the agreement. The unions were exercising bargaining restraint in the interests of improved performance of the labour market, and hence in the economy as a whole.
In the UK, the wage-setting curve also shifted down but in this case, it was because of a fall in union power brought about by changing industrial relations legislation, which weakened the ability of the non-inclusive unions to organize strike action. Explain how to use the labour market model wage-setting curve and price-setting curve to show the changes in labour market performance of the UK and the Netherlands from the early s to the early s, as discussed in this section.
The article by Nickell and van Ours referenced above is a good research resource for this question. As discussed in Unit 1, before the Industrial Revolution most of the output of the economy was made by family members. They were not employees but instead were independent producers of the goods and services both for their own use called home production and for sale to others. The Industrial Revolution and the emergence of the capitalist economic system shifted labour from the family and the farm to firms: independent producers became employees.
As a result, textiles and clothing once produced in the home were now purchased and paid for with the wages gained through industrial and other employment. The result was a sustained increase in employment in the industrial sector of the economy. Manufacturing makes up most of the employment in industry , and the terms manufacturing and industry are often used interchangeably.
Labour-saving innovation also made farming more productive. And as people became richer they spent less of their budget on food. Therefore the fraction of the labour force engaged in farming fell. For many, the shift out of farming and the rise of manufacturing employment meant an improvement in economic opportunities, especially when the trade unions and worker-based political parties forced employers to improve industrial working conditions. This did not last forever though.
Just as manufacturing had initially displaced agriculture as the main kind of employment, the production of services rather than goods has replaced manufacturing. US Bureau of Labor Statistics. Updated 14 October; International Labour Association.
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This began only in the last quarter of the twentieth century, yet the share of manufacturing employment in South Korea was already falling by the end of the century. Updated 14 October ; International Labour Association.
Taiwan now has a larger share of the labour force in manufacturing than Germany. Unlike the other countries in the figure, in China labour continued to be pulled into the manufacturing sector in the first decade of the 21st century. The amount of labour devoted to agriculture has declined in all of the countries shown in Figure Fewer than one in 20 workers in rich countries work in agriculture. The recent big shift in work has been from the production of goods manufacturing and agriculture to the production of services. We know that output per hour of labour productivity is growing more slowly in the production of services than in manufacturing.
This has two effects:. So we assume that people consume a given ratio of goods shirts, for example and services haircuts. The total amount of labour employed in the economy is assumed to be 1 it could be 1 million hours, for example. If all of this labour is devoted to the production of goods, 1 unit of goods is produced.
And the same is true of services: if all the labour produces services, then 1 unit of services is produced. The solid red line is the feasible frontier, showing the amounts of goods and services that are possible given the existing technologies and the amount of labour employed. We assume that the same number of units of goods and services are consumed, so in the figure the quantity of services and the quantity of goods consumed both equal half a unit in the first period.
In the second period, productivity rises in manufacturing while staying constant in services, meaning that the cost and hence the price of goods declines relative to services. Follow the steps in the analysis to see the effect on employment. Increased productivity in goods production raises the fraction of workers in services.
The solid red line is the feasible frontier and shows the amounts of goods and services that can be produced given the existing technologies and labour available. The productivity of labour in the production of goods doubles, but productivity remains unchanged in services. The new feasible frontier is shown as the dashed line. Labour has shifted from goods production to services production. This model is designed to illustrate why the shift took place. However, in the countries showing a decline in goods employment relative to services, the net effect of the things we have excluded from the model did not completely offset the deindustrialization of the workforce.
Another complicating factor is that some countries are net importers of goods while others are net exporters, meaning that many goods are purchased in a different country from where they were produced. This is part of the explanation for why different countries have different patterns for the hump-shaped relationship shown in Figure International trade and the opportunities for specialization that came with it accelerated the decline in the goods-producing share of employment in some countries the US and the UK, for example , but slowed it down in others Germany, South Korea.
The Einstein at the end of this section illustrates the logic behind Figure This Einstein explains the logic behind Figure In our model, the following equation holds:. We can now equate the first and last terms of the above equation to give us an expression for the amount of labour that must be employed in the two sectors, given the productivity levels in each sector, if they produce an equal number of units of output:.
We then rewrite this expression, using the fact that the total amount of labour in the two sectors sums to one:. Then we rearrange the equation using the first and last terms to get an expression for the amount of labour engaged in service production:. When the productivity of labour in goods production doubles:. This is the share of labour devoted to the production of services after the increase in productivity of the labour used in the production of goods. We have learned that national economies differ not only in how rapidly they adjust to the opportunities offered by technological change and other changes of circumstance, but also in the wages and employment that they can sustain in the long run.
These depend on many of the characteristics of economies that we have analysed in earlier units. Determinants of the unemployment rate and the growth rate of real wages in the long run. The institutions, policies, and shocks that can influence unemployment and real wages. Unemployment is a market failure: it means that there are people willing to work at the current market wage but cannot find a willing employer. Add to Wishlist. USD Sign in to Purchase Instantly. Explore Now. Buy As Gift.
Overview This unique volume consists of studies on medium-run macroeconomics that deal with aggregate economic issues that do not easily fit into either short-run business cycles or long-term growth. Readership: Graduate students and researchers who are interested in understanding medium-run macroeconomics.