Hysteresis and the European Unemployment Problem
Olivier J. Blanchard
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)
Lawrence H. Summers
Harvard University; National Bureau of Economic Research (NBER)
NBER Working Paper No. w1950
European unemployment has been steadily increasing for the last 15 years and isexpected to remain very high for many years to come. In this paper, we argue thatthis fact implies that shocks have much more persistent effects on unemployment thanstandard theories can possibly explain. We develop a theory which can explain suchpersistence, and which is based on the distinction between insiders and outsiders inwage bargaining. We argue that if wages are largely set by bargaining betweeninsiders and firms, shocks which affect actual unemployment tend also to affectequilibrium unemployment. We then confront the theory to both the detailed facts ofthe European situation as well as to earlier periods of high persistent unemploymentsuch as the Great Depression in the US.
Number of Pages in PDF File: 100working papers series
Date posted: May 26, 2004
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