Jakob B. Madsen

General Equilibrium Macroeconomic Models of Unemployment: Can They Explain the Unemployment Path in the OECD?

Several theories which seek to explain the high and apparently persistent unemployment in the OECD countries over the past two decades have arisen within the framework of imperfections in the goods and labour markets. Probably the most prominent theories within this class of models are the general equilibrium models of Phelps (1994), Layard and Nickell (1986) and Layard, et al. (1991), labelled structuralist theories of unemployment by Phelps (1994). Common to the structuralist theories is that the low frequency movements in unemployment, or the NAIRU, are determined by structural variables such as unemployment benefits, taxes, real interest rates, etc. However, the high frequency movements in unemployment are determined by wage and price surprises, and, in the Layard and Nickell (1986) model also by cyclical mark-ups. Employment is entirely determined by the firms willingness to supply and the firms are never sales constrained. By contrast the general equilibrium model of Sarantis (1993) which is in Post Keynesian spirit, suggests that unemployment on all frequencies is mainly an outcome of demand side factors. In this model imperfections in the goods and labour markets are less important determinants of unemployment. In this paper I estimate the extent to which the models of Phelps (1994), Layard and Nickell (1986) (henceforth L & N), and Sarantis (1993), are able to explain the unemployment path of the OECD countries using annual data over the period 1960 to 1993. The theoretical set-up of the models is presented in section 1 and the empirical estimates are set out in section 2.

Asymmetric Price Adjustment in a Menu-cost Model

In this paper we demonstrate that the menu-cost model implies that prices adjust asymmetrically to nominal-demand shocks and that the asymmetry is linked to the elasticity of demand as well as menu costs. These implications are tested using manufacturing and retailing panel data for the OECD countries. The empirical results give some support for the menu-cost model.

Direct Tests of the Permanent Income Hypothesis under Uncertainty, Inflationary Expectations and Liquidity Constraints

Several studies have argued that the life-cycle permanent income hypothesis (LC-PIH) of Hall (1978) breaks down because of the excess sensitivity of consumption to current income and through consumers failing to exploit information which is available in period t-1. Using direct expectations data based on consumer surveys for the U.S., this study shows that when uncertainty, in particular, and credit constraints are accommodated in the model, consumption is not sensitive to current income. Moreover, contrary to previous empirical findings, the index of consumer confidence is found to be unable to predict consumption. Thus, the theoretical predictions of the rational expectations LC-PIH are unfounded empirically because they fail to accommodate uncertainty, in particular, and credit constraints.

Real Wages in Australia and Canada, 1870–1913: Globalization versus Productivity

Australias and Canadas real wage experiences between 1870 and 1913 were distinctive. Faster productivity growth underpinned Canadas overtaking of Australias wage levels. The globalization forces of migration and trade also shaped their comparative wages, principally by reducing wage growth in Canada. Immigration increased slightly Australias real wages, but reduced wage levels in Canada, and tempered there the beneficial effects of rising productivity and improving terms of trade. In contrast, wage earners share of national income rose after 1890 in Australia, with the productivity slowdown hitting chiefly rents and profits. Distributional shifts favouring wage earners in Australia, and the depressing effects of mass immigration on wages in Canada, limited Canadas wage lead before 1914, despite her faster productivity growth.

The NAIRU and Classical Unemployment in the OECD Countries

Using panel data for the OECD countries over the period 1960-93 this paper estimates the NAIRU, tests the restrictions implied by the NAIRU and estimates the extent to which the NAIRU is able to explain the low frequency movements in unemployment. The results indicate that the long-run restrictions imposed on the NAIRU are not satisfied for many countries and that the NAIRU is unable to account for the low frequency movements in unemployment.

On errors in variable biases in estimates of export price elasticities

Abstract The literature has long suggested that estimates of export price elasticities are biased toward −1. This paper demonstrates that they are either unbiased or biased towards zero, depending on estimation method.

New Keynesian versus New Classical Theories of Aggregate Supply: Evidence from the OECD Countries

Using annual and quarterly data for the OECD countries, this paper tests four theories of aggregate supply, namely the sticky wage, the sticky price, the worker misperception and the producer misinformation models. The empirical estimates suggest that the short run aggregate supply curve is positively sloped as a result of price and wage stickiness. Furthermore, the slope of the aggregate supply curve is found to be a positive function of the rate of inflation which is consistent with the sticky price model. Copyright 1998 by Scottish Economic Society.

The Household Balance Sheet, Credit, and Uncertainty at the Onset of the Great Depression in the USA

The influence of the household balance sheet, the supply of credit, and uncertainty on consumer spending during the early years of the Great Depression in the USA are assessed within a unified life-cycle consumption function framework. Income uncertainty played the dominant role in the spending declines of 1930 and 1932. The depletion of households financial assets contributed modestly to the consumption falls in 1931–1932. Indebtedness, the severe penalties surrounding installment debt default, and the supply of credit had little effect on the consumer spending slump.

Forecasts with production expectations integrated into a macroeconomic model

This paper suggests that forecasts of changes in production from production expectations can be improved by using the information contained in a reduced form macroeconomic model. The model is estimated using quarterly data for 14 OECD countries. The estimation results indicate that the forecast of changes in production from survey production expectations can be improved by embedding the macroeconomic model into the forecast equations.