the structure of unemployment we test for a unit root in postwar unemployment rates for sixteen oecd countries when a one time structural break is incorporated the unit root hypothesis can be rejected for most of the countries and the measured persistence of unemployment falls dramatically we then test for multiple structural changes and find evidence of one or two breaks for those countries for which the unit root hypothesis could be rejected almost all of the breaks are positive reflecting the sustained rise in european unemployment the major exception is the united states where long term unemployment rose in the 1970s and fell in the 1980s

growth and unemployment this paper analyses the effects of growth on long run unemployment using a search model of equilibrium unemployment where growth arises explicitly from the introduction of new technologies that require labour reallocation for their implementation the analysis uncovers and compares between two competing effects of growth on unemployment the first is a capitalisation effect whereby an increase in growth raises the capitalised returns from creating jobs and consequently reduces the equilibrium rate of unemployment the second is a creative destruction effect whereby an increase in growth reduces the duration of a job match thereby raising the equilibrium level of unemployment both directly by raising the job separation rate and indirectly by discouraging the creation of job vacancies this paper asks the question of how the rate of economic growth affects unemployment in the long run the main consideration that leads us to think that this is an interesting question has to do with the re allocative aspect of growth in the long run faster economic growth must come from a faster increase in knowledge to the extent that the advancement of knowledge is embodied in industrial innovations it is likely to raise the job destruction rate through automation skill obsolescence and the bankruptcy associated with the process of creative destruction in short increased growth is likely to produce an increased rate of job turnover and the search theories of lucas and prescott 1974 and pissarides 1990 imply that an increased rate of job turnover will result in a higher natural rate of unemployment this conclusion is also consistent with the empirical results of davis and haltiwanger 1990 which show that periods of high unemployment tend to be periods of high job turnover at the establishment level it suggests the possibility of a positive longrun tradeoff between growth and unemployment at least over some range there has been relatively little attention paid to our question in the literature on longrun determinants of unemployment for example the recent empirical examination by layard nickell and jackman 1991 of unemployment rates among oecd countries did not even consider the rate of economic growth as a possible explanatory variable this is consistent with the seminal theoretical work of phelps 1968 which implies that the natural rate of unemployment is independent of the rate of productivity growth the only

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

structural evolution of the postwar u s economy we consider a time varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the lucas critique for the postwar u s economy the model allows blocks of parameters to change at endogenously estimated points of time contrary to the lucas critique there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in reduced form parameters for inflation or the unemployment rate however the structure of the u s economy has evolved considerably over the postwar period with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation though not on the unemployment rate related we find changes in the phillips curve tradeoff between inflation and cyclical unemployment measured as the deviation from the time varying steady state unemployment rate implied by the model in the 1970s and especially since the mid 1990s

when do long run identifying restrictions give reliable results many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long run effects of shocks this article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions although many aspects of these issues have been raised before this article draws out and illustrates the implications for inferences under the long run scheme furthermore it provides strategies for dealing with the problems

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

wages business cycles and comparative advantage abstract the standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages the model augments the standard rbc model to include lucas span of control distinction between market and non market and managerial and non managerial work makes aggregate wages far less cyclical than individual wages cross sectional comparative advantage between market and non market sector in the workforce substantially increases the response of aggregate hours to shifts in relative productivity as a result the model provides a reconciliation between data and equilibrium macroeconomics

demand variability supply shocks and the output inflation tradeoff this paper examines the shift in the relation between the inflation rate and the rate of growth of real output which has occurred in the united states over the past three decades and attempts to assess the relative importance of three possible lines of explanation a the new classical view of the output inflation tradeoff initially specified by lucas b the effect of supply side shocks such as energy prices c the effect of inflation variability on the natural rate of real output as hypothesized by milton friedman the paper concludes that b and c seem to have played a significant role in the observed shift from a positive to a negative correlation between the rate of inflation and the rate of real output growth but that a did not this abstract was borrowed from another version of this item

modern theory of unemployment fluctuations empirics and policy applications strong and widely accepted evidence shows that the natural rate of unemployment varies over time with substantial amplitude the frictions in the labor market that account for positive normal levels of unemployment are not simple and mechanical instead as a rich modem body of theory demonstrates the natural rate of unemployment is an equilibrium in which the volumes of job seeking by workers and worker seeking by employers reach a balance controlled by fundamental determinants of the relative prices of the two activities in recessions unemployment rises and job vacancies fall the natural explanation is an economywide fall in labor demand but a compelling model that generates a fall in labor demand without a counterfactual fall in productivity has eluded theorists to date nonetheless policymakers have appropriately adopted the view that the natural rate varies over time and is not a simple benchmark for setting monetary instruments

changes in u s wages 1976 2000 ongoing skill bias or major technological change this article examines the determinants of changes in the u s wage structure from 1976 to 2000 our main empirical observation is that changes in both the level of wages and the returns to skill over this period were primarily driven by changes in the ratio of human capital to physical capital we show that this pattern conforms extremely well to a simple model of technological adoption following a major change in technological opportunities in contrast we do not find much empirical support for the view that ongoing factor augmenting skill biased technological progress has been an important driving force over this period

the time varying nairu and its implications for economic policy the nairu the unemployment rate consistent with a constant rate of inflation is estimated in this paper as a parameter allowed to vary over time value is determined in an econometric model where the inflation rate depends on its past values demand and supply shocks the nairu estimated for the gdp deflator varies over the past forty years within 5 4 to 6 5 percent its estimated value for the most recent quarter 1996 q2 is 5 6 percent the nairu has declined in recent years in response to global competition immigration other factors weakening labor s bargaining position and the rapidly declining prices of computers and other electronics

estimating the natural rate of unemployment and testing the natural rate hypothesis how should one measure the natural rate of unemployment this paper proposes a systems procedure as an alternative to nairu the natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate the rate of wage growth and the rate of inflation the model is derived from a version of the wage bargaining model of blanchard and embodies a version of the natural rate hypothesis the model is estimated by embedding the kalman filter within the full information maximum likelihood procedure for us data the estimated model implies substantial post war variation in the natural rate and a negative but weak effect of inflation surprises on unemployment copyright 1999 john wiley sons ltd

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

the dynamics of uncertainty or the uncertainty of dynamics stochastic j curves that the u s trade account will improve in response to a depreciation is not generally in doubt the key questions are by how much and by when addressing these questions involves studying the distribution of trade account responses to a depreciation given a depreciation of the dollar the paper generates this distribution by simulating a trade model with random drawings of both innovations and elasticity estimates unlike previous studies this analysis explains trade on a bilateral basis and uses the full information maximum likelihood estimator for parameter estimation according to the findings the dispersion of trade account responses grows over time and is directly related to the magnitude of the depreciation furthermore the probability of a slow adjustment of the trade account is relatively high and the 95 percent confidence intervals are too wide to be useful for policies that target a given trade account path copyright 1991 by mit press

the nairu in theory and practice airu stands for the nonaccelerating ine ation rate of unemployment it is beyond dispute that this acronym is an ugly addition to the english language there are however two issues that fail to command consensus among economists which we address in this essay the e rst issue is whether the concept of the nairu is a useful piece of business cycle theory we believe it is and we begin this paper by attempting to explain why in our view the nairu is approximately a synonym for the natural rate of unemployment this concept follows naturally from any theory that says that changes in monetary policy and aggregate demand more generally push ine ation and unemployment in opposite directions in the short run once this short run tradeoff is admitted there must be some level of unemployment consistent with stable ine ation the second issue is why the nairu changes over time and in particular why it fell in the second half of the 1990s this question is more dife cult and the answer is open to debate most likely various factors are at work including demographics and government policies yet one hypothesis stands out as particularly promising e uctuations in the nairu appear related to e uctuations in productivity in the 1970s the nairu rose when productivity growth slowed in the 1990s the nairu fell when productivity growth sped up developing and testing models that explain the links among ine ation unemployment and productivity remains a challenge for students of business cycle theory

is there a j curve abstract if the response of the value of the trade balance to movements in the real exchange rate is described by a j curve then a real depreciation initially worsens a balance of trade deficit only improving it over time this paper investigates whether a j curve can be detected in the last twenty five years of american data no statistically reliable evidence of a stable j curve is detected the model is checked extensively to support this finding

financial intermediation business failures and real business cycles in this paper a general equilibrium business cycle model is construct ed that when subjected to real disturbances mimics observed qualita tive comovements among real output money business failures risk pr emia intermediary loans and prices in contrast monetary disturban ces generate cycles that have several inconsistencies with empirical evidence thus providing support for real business cycle theory at th e expense of monetary theories of the business cycle financial inter mediation arises endogenously in the model and intermediation matters for business cycle behavior a credit supply mechanism acts in tande m with an intertemporal substitution effect in propagating stochastic disturbances copyright 1987 by university of chicago press

monetary policy elasticity dynamics and real exchange rate reversal models of hysteresis in trade invoke permanent shifts in competitiveness to explain the real exchange rate reversal of the 1980s these models predict an immediate and permanent response of competitiveness to exchange rate overshooting in contrast an extensive empirically based j curve literature suggests a lagged response of competitiveness to real exchange rate movements this paper shows that such trade balance elasticity dynamics offer an attractive alternative explanation of real exchange rate reversal copyright 1995 by ohio state university press

the naicu and the phillips curve an approach based on micro data in this paper we propose a straightforward method to derive a non accelerating inflation capacity utilisation rate naicu based on micro data we condition the current capacity utilisation of firms on their current and planned price adjustments the non accelerating inflation capacity utilisation rate is then defined as the rate where a firm feels no price adjustment pressure one of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with often rather arbitrary statistical filters we show that our aggregate naicu performs remarkably well as an indicator of inflationary pressure in a phillips curve estimation

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

macroeconomic shocks in a dynamized model of the natural rate of unemployment at the microeconomic level this paper revises and broadens the theory of the equilibrium rate of unemployment the natural rate in a monetary model the authors begin by recreating steven salop s turnover model of the natural rate in its naturally intertemporal version useful findings on impact effects and the adjustment process at the individual firm necessarily excluded by the static version are shown to derive from the dynamized model at the macroeconomic level the authors then provide a general equilibrium analysis of some shocks showing how they drive the equilibrium unemployment rate and in varying ways also disturb the real rate of interest copyright 1992 by american economic association

testing the nairu model for the united states this paper tests using u s data the dynamics implied by the nairu view of the relationship between inflation and the unemployment rate the results are somewhat sensitive to the measure of inflation used but they generally reject the dynamics an alternative way of thinking about the relationship between inflation and the unemployment rate is suggested

in search of the natural rate of unemployment abstract the natural rate of unemployment can be measured as the time varying steady state of a structural vector autoregression for post war us data the natural rate implied by this approach is more volatile than most previous estimates with its movements accounting for the bulk of the variation in the unemployment rate as well as substantial portions of the variation in aggregate output and inflation these movements in turn can be related to variables associated with labor market search theory including unemployment benefits labor productivity real wages and sectoral shifts in the labor market there is also a strong negative relationship between inflation and the corresponding measure of cyclical unemployment supporting the existence of a short run phillips curve

the internal economics of the firm evidence from personnel data we analyze twenty years of personnel data from one firm the hierarchical structure is quite simple and stable career movements suggest that the employee s rate of learning and the firm s learning about ability are important there are promotion fast tracks exit rates vary little with tenure or salary the firm has personnel policies like those described in the internal labor markets literature although several theoretical preconditions for ilms such as ports of entry and exit are lacking job levels are important to compensation but there is also substantial individual variation in pay within levels our companion paper in this issue explores the wage policy of this firm

the informational content of surnames the evolution of intergenerational mobility and assortative mating we propose a new methodology for measuring intergenerational mobility in economic well being our method is based on the joint distribution of surnames and economic outcomes it circumvents the need for intergenerational panel data a long standing stumbling block for understanding mobility it does so by using cross sectional data alongside a calibrated structural model to recover the traditional intergenerational elasticity measures our main idea is simple if inheritance is important for economic outcomes then rare surnames should predict economic outcomes in the cross section this is because rare surnames are indicative of familial linkages if the number of rare surnames is small this approach will not work however rare surnames are abundant in the highly skewed nature of surname distributions from most western societies we develop a model that articulates this idea and shows that the more important is inheritance the more informative will be surnames this result is robust to a variety of different assumptions about fertility and mating we apply our method using the 2001 census from catalonia a large region of spain we use educational attainment as a proxy for overall economic well being a calibration exercise results in an estimate of the intergenerational correlation of educational attainment of 0 60 we also find evidence suggesting that mobility has decreased among the different generations of the 20th century a complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method our model and our data allow us to examine one possible explanation for the observed decrease in mobility we find that the degree of assortative mating has increased over time overall we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner

does the time consistency problem explain the behavior of inflation in the united states abstract this paper derives the restrictions imposed by barro and gordon s theory of time consistent monetary policy on a bivariate time series model for inflation and unemployment and tests those restrictions using quarterly us data from 1960 through 1997 the results show that the data are consistent with the implications of the theory for the long run behavior of the two variables indicating that the theory can explain the initial rise and subsequent fall of inflation over the past four decades the results also suggest that the theory must be extended to account more fully for the short run dynamics that appear in the data

monotone matching in perfect and imperfect worlds we study frictionless matching in large economies with and without market imperfections providing sufficient conditions for monotone matching that are weaker than those previously known necessary conditions which depend on a key analytical object we call the surplus function are also offered changes in the surplus yield valuable information about the comparative statics of matching patterns across environments we apply our framework to some examples adapted from the literature accounting for and extending several comparative static and welfare results we also explore the dependence of the matching pattern on the type distribution

occupational choice and development abstract the rise in world trade since 1970 has been accompanied by a rise in the geographic span of control of management and hence also a rise in the effective international mobility of labor services we study the effect of such a globalization of the world s labor markets the world s welfare gains depend positively on the skill heterogeneity of the world s labor force we find that when people can choose between wage work and managerial work the worldwide labor market raises output by more in the rich and the poor countries and by less in the middle income countries this is because the middle income countries experience the smallest change in the factor price ratio and where the option to choose between wage work and managerial work has the least value in the integrated economy our theory also establishes that after economic integration the high skill countries see a disproportionate increase in managerial occupations using aggregate data on gdp openness and occupations from 115 countries we find evidence for these patterns of occupational choice

is there a core of practical macroeconomics that we should all believe with emphasis on the adjective practical and the normative verb should my answer to the question of this session is a resounding yes indeed i spent a good deal of time between january 1993 and january 1996 acting on the belief that there is such a core macro model so i certainly hope it exists this believable core model falls well short of perfection leaves many questions unanswered and is subject to substantial stochastic errors nonetheless it is both useful and extensively used in policy analysis where contact with reality is a necessity and you cannot beat something with nothing it also closely resembles but does not quite match the way macroeconomics is taught to beginning and intermediate but not to graduate students in this short presentation i will describe briefly the main practical elements that i think we should agree on without worrying too much about their theoretical underpinnings then i will turn to two critical failings of the standard macro model which cry out for theoretical and empirical repair my organizing principle is the textbook exposition that has been standard though not universal in teaching intermediate macroeconomics for years the question is how does it differ from the core model used in policy analysis

inherent inequality and the optimal graduation of marginal tax rates in most countries marginal tax rates increase with income this is at variance with the results of the optimal income taxation literature whose numerical calculations have established the presumption that optimal marginal tax rates should decline with income have the existing results of optimal income tax literature therefore established a presumption that the observed pattern is suboptimal the object of this paper is to attempt to answer this question the numerical calculations that followed mirrlees s 1971 pioneering contribution tried many variations on his basic parametrisation including different preference structures and different functional forms however so far as we are aware most of the reported results maintain his basic assumption of a log normal distribution of abilities or wages with a standard deviation of logs of 0 39 mirrlees 1971 himself appealed the work of lydall 1969 for this figure but it has become the industry standard we show in this paper that departures from this assumption in particular increases in inherent inequality can alter the qualitative pattern of optimal marginal tax rates dramatically contrary to the currently available calculations we show that the optimal graduation can indeed be such that marginal tax rates increase for the majority of the population which is consistent with the observed pattern but that there continues to exist a significant income range at the top where marginal tax rates decline which of course is counter to the observed pattern

measuring the nairu evidence from seven economies several specifications of state space models are used to obtain estimates of the nairu for the g7 except japan plus australia over the past 28 years a phillips curve type regression is shown to deliver estimates that do not mimic low frequency movements in unemployment rates even when a drift is included in the specification of the nairu standard errors around the estimates are extremely large using information about the behavior of unemployment in addition to inflation alleviates both these shortcomings

exchange rate pass through abstract the resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass through relationship so far there has not been a comprehensive survey of this literature the paper aims to fill this gap in two ways first it pieces together the theoretical literature on exchange rate pass through second it provides a critical survey of the empirical literature on exchange rate pass through emphasis is placed on the data and methodology employed in previous work this is done in order to guide future work in this growing area of research

profitability and growth the link between profitability and growth is explored by means of an alternative explanation suggested by standard neoclassical theory of the firm the growth model developed clarifies the relationships between the real wage rate the rate of profit taxation and savings behavior and the rate of growth

wage inequality segregation by skill and the price of capital in an assignment model abstract some pieces of empirical evidence suggest that in the u s from the 1970s to the 1990s i wage inequality between plants rose much more than wage inequality within plants and ii there was an increase in the segregation of workers by skill into separate plants this paper presents a frictionless assignment model in which these two features can be explained simultaneously as the result of the decline in the relative price of capital additional implications of the model regarding the skill premium and the dispersion in labor productivity across plants are also consistent with the empirical evidence the model permits to consider changes in the skill distribution too combining these changes with falling capital prices provides a more comprehensive view of the overall trend of wage inequality and of workers segregation by skill in the data and it helps explaining some episodes of decreasing wage inequality

unemployment insurance and unemployment spells this paper tests the effects of the level and length of unemployment insurance benefits on unemployment durations the paper particularly studies individual behavior during the weeks just prior to when benefits lapse higher unemployment insurance benefits are found to have a strong negative effect on the probability of leaving unemployment however the probability of leaving unemployment rises dramatically just prior to when benefits lapse individual data are used with accurate information of spell durations and the level and length of benefits the semiparametric estimation techniques used in the paper yield more plausible estimates than conventional approaches and provide useful diagnostics copyright 1990 by the econometric society

productivity growth on the job search and unemployment abstract the impact of long run productivity growth on unemployment is studied we incorporate disembodied technological progress and on the job search into the endogenous job separation model of mortensen and pissarides 1994 because we include on the job search faster growth reduces unemployment by decreasing job separation and inducing job creation the incorporation of on the job search substantially improves the ability of the mortensen and pissarides model to explain the effect of growth on labor market variables specifically our model generates not only an empirically consistent sign of the effect but also a larger impact of growth on unemployment than the standard matching model

the stock market crash of 2008 caused the great recession theory and evidence abstract this paper argues that the stock market crash of 2008 triggered by a collapse in house prices caused the great recession the paper has three parts first it provides evidence of a high correlation between the value of the stock market and the unemployment rate in u s data since 1929 second it compares a new model of the economy developed in recent papers and books by farmer with a classical model and with a textbook keynesian approach third it provides evidence that fiscal stimulus will not permanently restore full employment in farmer s model as in the keynesian model employment is demand determined but aggregate demand depends on wealth not on income

the relationships between permanent and transitory movements in u s output and the unemployment rate this paper estimates the permanent and transitory movements in u s output and the unemployment rate and the relationships between them the results suggest that permanent movements in u s output and the unemployment rate are important for explaining overall fluctuations further the correlation between changes in these series arises in large part due to the relationship between their permanent components

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

search wage bargains and cycles in this paper i describe an equilibrium model of job matchings with perfect foresight that has the following property the number of people looking for work changes temporarily when there is a temporary shock to the value of labour s marginal product it does not change when the shock is permanent by contrast real wages change temporarily by a small amount when the shock is temporary but change permanently and by a bigger amount when the shock is permanent thus the model offers an explanation for the observation that over the cycle small wage changes are associated with changes in unemployment whereas secularly wage growth does not seem to affect the rate of unemployment the two most common explanations for this observation in the literature the phelps lucas misperceptions model and the lucas rapping intertemporal substitution model are well grounded in equilibrium theory but they have not stood up well to empirical testing the misperceptions model requires more ignorance of aggregate changes than can be reasonably assumed whereas the intertemporal substitution model requires bigger wage elasticities of labour supply than those estimated in the model of this paper neither misperceptions nor changes in the supply of labour play a role in generating the unemployment cycle all agents observe the shocks when they occur and they anticipate correctly the economy s adjustment path but like the new classical explanations of the cycle the model is an equilibrium one in the sense that all private gains from trade are fully exploited at all phases of the cycle although the social gains from trade may not be fully exploited because of search externalities the cycle i derive here is not due to externalities unlike other related perfect foresight models such as diamond s 1982a the structure of the model is such that the externalities do not give rise to multiple equilibria the key element of the model which is responsible for the transmission of output shocks to unemployment is the equation for wages in markets where the allocation of jobs takes place through search both firms and workers have some monopoly power a point emphasised by mortensen 1970 though he attributed only temporary monopoly power and only to firms i use the nash bargaining solution to solve for the equilibrium wage rate and show that the firm s and worker s alternative returns threat points or

the cleansing effect of recessions the authors investigate industry response to cyclical variations in demand production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed although outdated units are the most likely to turn unprofitable and be scrapped in a recession they can be insulated from the fall in demand by a reduction in creation the structure of adjustment costs plays a determinant role in the responsiveness of those two margins the calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series and their asymmetries over the cycle copyright 1994 by american economic association

interview with edmund s phelps edmund s phelps has been mcvickar professor of political economy at columbia university in new york city new york since 1982 and director of the center on capitalism and society at columbia university s earth institute since 2001 in 2006 he was awarded the nobel memorial prize in economic science for his analysis of intertemporal tradeoffs in macroeconomic policy we interviewed professor phelps at his hotel in san francisco on january 3 2009 while attending the annual meeting of the allied social science associations