Kiel Working Papers, Kiel Institute for World Economics
No 1378:
The Macroeconomics of the Labor Market: Three Fundamental Views
Marika Karanassou, Hector Sala and Dennis Snower
Abstract: We distinguish and assess three fundamental views of the
labor market regarding the movements in unemployment: (i) the frictionless
equilibrium view; (ii) the chain reaction theory, or prolonged adjustment
view; and (iii) the hysteresis view. While the frictionless view implies a
clear compartmentalization between the short- and long-run, the hysteresis
view implies that all the short-run ‡uctuations automatically turn into
long-run changes in the unemployment rate. We assert the problems faced by
these conceptions in explaining the diversity of labor market experiences
across the OECD labor markets. We argue that the prolonged adjustment view
can overcome these problems since it implies that the short, medium, and
long runs are interrelated, merging with one another along an intertemporal
continuum.
Keywords: unemployment, interactive labor market dynamics, interplay of lags and shocks, frictional growth, growth drivers; (follow links to similar papers)
JEL-Codes: E22,; E24,; J21,; J30; (follow links to similar papers)
32 pages, September 2007
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