Hysteresis and the European Unemployment Problem

100 Pages Posted: 26 May 2004 Last revised: 31 Oct 2022

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peterson Institute for International Economics

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: June 1986

Abstract

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.

Suggested Citation

Blanchard, Olivier J. and Blanchard, Olivier J. and Summers, Lawrence H., Hysteresis and the European Unemployment Problem (June 1986). NBER Working Paper No. w1950, Available at SSRN: https://ssrn.com/abstract=227081

Olivier J. Blanchard (Contact Author)

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Lawrence H. Summers

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