Charles R. Bean

The rise in unemployment: a multi-country study

One of the most remarkable features of recent economic history has been the remorseless rise in unemployment throughout the industrialized countries. However, while the trend to higher unemployment is universal, the experience of individual countries also differs widely. The increase is especially marked within the European Community, where unemployment rates rival those reached in the interwar years. By contrast, in the Scandinavian countries and japan unemployment is lower and has risen very much less. Experience in the United States lies somewhere between these extremes, and in the last few years unemployment there has fallen sharply.

Targeting Nominal Income: An Appraisal

The practice of setting target growth rates for a year or more ahead for some measure of the mofiey supply is now followed by many industrialised countries. However it has been suggested by a number of authors (e.g. Meade (I978) in his Nobel prize lecture, Tobin (I980) in his retrospective on stabilisation policy, Brittan (I98I)) that it would be more sensible to pursue targets for nominal income rather than the money supply. Meade, for instance, argues that controlling nominal income is in any case the ultimate goal of those who favour fixed monetary targets, and that an excessive concentration on the means rather than the end is confusing to private agents and can lead to undesirable fluctuations in the demand for output when velocity shifts. He goes on to advocate that nominal income targets should be linked to the development of wage-fixing institutions designed to mimic competitive behaviour. In this paper we examine the implications of such a proposal for the performance of the economy in the context of a simple stochastic macroeconomic model under rational expectations. A contracting framework is adopted in which the wage is fixed in a state of uncertainty about future levels of demand and productivity. The objective of the authorities is to minimise the divergence of output from its full information equilibrium level. If labour supply is inelastic then it turns out that maintaining the level of nominal income is actually the optimal policy. If labour supply is elastic nominal income targetry provides an optimal response to demand (IS/LM) shocks but a suboptimal response to productivity shocks. However, a sufficient condition for a nominal income target to be preferable to a fixed money supply target is that the price elasticity of aggregate demand be less than unity. The paper concludes by examining the implications of pursuing target growth rates rather than levels. It should be conceded at the outset that there are several pertinent issues not addressed such as the greater comprehensibility of nominal income targets to private agents, or the possibility that nominal income targets may leave the authorities with too much discretion, e.g. Poole (I980). The issue of labour market reform is also ignored. This is an enormous subject which it would be impossible to do justice to here - see for instance Meades own analysis of the problem in Meade (I982). Such reforms might be expected to affect the parameters of the model. Nevertheless since changes in labour market practices are neither a precondition for, nor a logical consequence of, nominal income targets, an independent analysis of the macrceconomic implications of the latter is still highly relevant.

Endogenous growth and the procyclical behaviour of productivity

Abstract In this paper a model with endogenous growth is used to explain the procyclical behaviour of productivity. Periods when the marginal return to goods production is high are associated with low levels of human capital formation and other investment-like activities. In particular, the model successfully explains the surges in productivity exhibited in the UK during wartime and the apparently permanent effect of the level of defence spending on the growth of total factor productivity.

Capital shortages and persistent unemployment

Capital shortage Charles Bean Over the last 10 years the rate of investment has been depressed throughout the European Community, Some people believe that as a result there is insufficient capacity to absorb the unemployed in the event of a recovery in real demand. I estimate the size of this ‘capital gap’ and find that investment may need to rise by as much as 20% above the levels experienced during the first half of the 1980s, However, this represents no more than a return to the investment rates of the early 1970s, Furthermore firms will respond to capital shortages by installing new capital provided it is profitable. Thus the required resurgence in investment will arise automatically, so that capacity shortages are likely to be a temporary phenomenon at worst. The real obstacles to a rapid return to full employment lie elsewhere, paticularly in the labour market. The presence of such transient capacity shortages during any sustained recovery does not, by itself, justify policy measures discriminating in favour of investment, for there is no obvious market failure involved. However, a sustained recovery will almost certainly be associated with a significant spurt in investment. It is quite appropriate for this to be financed by borrowing from abroad, so governments should be willing to see a deterioration in their current accounts and should not adopt deflationary macroeconomic policies to restrain demand.

Ten Years of Mrs. T

We argue that the 1970s were characterized by attempts to maintain a cooperative, low-unemployment equilibrium in the face of considerable union power, through the use of incomes policies and neo-corporatist machinery. The 1980s saw a shift away from this, toward direct measures to limit union power. This, together with the adoption of tight macroeconomic policies, explains the initial rise in unemployment. Empirical evidence suggests that its persistence throughout the decade is due to the effect of prolonged unemployment on the search behaviour of the outsiders, rather than the insider mechanism emphasized by Blanchard and Summers, and others. The reduction in union power also helps to explain the acceleration in productivity growth. The craft nature of much of the British union movement has led to a multiplication of bargaining units within firms. Bargaining in isolation a union can perceive overmanning and other restrictive practices as being in its interests, resulting in low wages and productivity. A fall in union power results in a reduction in these inefficiencies and leads not only to a rise in productivity but also in wages. Cross-section empirical evidence supports the thesis that the productivity acceleration has been greatest where multi-unionism is present. We also show how this explains the widening in pre-tax as well as post-tax earnings.

Financial Frictions and the Monetary Transmission Mechanism: Theory, Evidence and Policy Implications

This paper provides a brief survey of the role of financial frictions in the monetary transmission mechanism. After noting some of the key stylised facts that any model of the transmission mechanisms must be consistent with, we discuss both the classical interest rate channel and the credit and bank lending channels of monetary transmission. We then review the empirical evidence relating to the relative importance of these channels. Finally we consider what impact the presence of significant financial frictions might have on the conduct of monetary policy JEL Classification: E52, E58, E44

European unemployment: A retrospective

Abstract This paper briefly reviews thinking on the causes of high and persistent unemployment, especially within the European Community. Some limitations of the empirical literature are noted and some new results on the nature of the shocks and sources of cross-country differences in the response to these shocks is provided.

The Rise in unemployment

The rise in unemployment is one of the key world economic problems of our time. Its causes are complex, particularly since, although unemployment has risen in most countries, the size of the increase differs greatly. This wide-ranging volume, written by leading economists in the field, contains detailed studies of the unemployment experience of most of the major developed economies, providing an invaluable guide to this global dilemma.

Employment in the British Coal Industry: A Test of the Labour Demand Model

The authors test the conventional model of labor demand against the alternative that bargaining takes place over both wages and employme nt for a time-series, cross-section data set covering the British coal industry. They note the difficulty of identifying the contract curve under the alternative hypothesis, and suggest the use of variables affecting the union and management status quo points as instruments for the endogenous wage. They find that outside variables, such as benefits and manufacturing wages, are important in determining the level of employment, thus rejecting the labor-demand model. Copyright 1988 by Royal Economic Society.

The Terms of Trade, Labour Supply and the Current Account

This paper extends Svensson and Razins two period analysis of the Laursen-Harberger-Metzler effect to the important case where labour supply and output are variable. A terms of trade shift alters the relationship between the product and the consumption wage and so induces a change in output. This extension substantially enriches their analysis. A temporary current terms of trade deterioration has an ambiguous effect on the current account, but their finding that a future deterioration leads to an improvement in the current account is strengthened. The effect of a permanent terms of trade shift in a stationary state depends not only on the rate of time preference, but also on the strength of intertemporal substitution effects. In the canonical case of a constant rate of time preference the current account deteriorates in response to a permanent terms of trade deterioration if the degree of intertemporal substitution in consumption exceeds that in leisure, or equivalently whether the wealth effect on consumption exceeds that on labour supply. The model is then extended to an infinite horizon by embedding it in an overlapping generations framework. Intergenerational linkages through the labour market are now the source of some complex dynamics. From an initial position of balance on current account an anticipated temporary terms of trade deterioration leads to a period of steadily increasing surplus a deficit on impact, and a further period of declining surpluses. A permanent deterioration in the terms of trade leads to a similar period of anticipatory surpluses, followed by a period of declining deficits after impact.