Unemployment: macroeconomic performance and the labour market

In this paper, I construct an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters. I show that the equilibrium allocation is socially optimal. I also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay.

Competitive Search Equilibrium

A quantitative investigation of financial intermediation in the United States over the past 130 years yields the following results: (i ) the finance industry’s share of gross domestic product (GDP) is high in the 1920s, low in the 1960s, and high again after 1980; (ii ) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, liquidity); (iii ) intermediation has constant returns to scale and an annual cost of 1.5–2 percent of intermediated assets; (iv) secular changes in the characteristics of firms and households are quantitatively important. (JEL D24, E44, G21, G32, N22) This paper is concerned with the theory and measurement of financial intermediation. The role of the finance industry is to produce, trade, and settle financial contracts that can be used to pool funds, share risks, transfer resources, produce information, and provide incentives. Financial intermediaries are compensated for providing these services. The income received by these intermediaries measures the aggregate cost of financial intermediation. This income is the sum of all spreads and fees paid by nonfinancial agents to financial intermediaries and it is also the sum of all profits and wages in the finance industry. This cost of financial intermediation affects the user cost of external finance for firms who issue debt and equity, and the costs for households who borrow or use asset management services.

/pdf/has-the-u-s-finance-industry-become-less-efficient-on-the-4iuu52fboi.pdf

Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation

The standard model of optimal growth, interpreted as a model of a market economy with infinitely long-lived agents, does not allow separation of the savings decisions of agents from the investment decisions of firms. Investment is essentially passive: the "one good" assumption leads to a perfectly elastic investment supply; the absence of installation costs for investment leads to a perfectly elastic investment demand. On the other hand, the standard model of temporary equilibrium used in macroeconomics characterizes both the savings-consumption decision and the investment decision, or, equivalently, derives a well-behaved aggregate demand which, in equilibrium, must be equal to aggregate supply. Often, however, we want to study the movement of the temporary equilibrium over time in response to a particular shock or policy. The discrepancy between the treatment of investment in the two models makes imbedding the temporary equilibrium model in the growth model difficult. This paper characterizes the dynamic behavior of the optimal growth model with adjustment costs. It shows the similarity between the temporary equilibrium of the corresponding market economy and the short-run equilibrium of standard macroeconomic models: consumption depends on wealth, investment on Tobin's q. Equilibrium is maintained by the endogenous adjustment of the term structure of interest rates. It then shows how the equivalence can be used to study the dynamic effects of policies; it considers various fiscal policies and exploits their equivalence to technological shifts in the optimal growth problem.

An Intertemporal Model of Saving and Investment

Since the seventies problems in the labor market have presented a serious challenge to policy markers. Unemployment tends to rise in a downturn but barely falls in the upswing. Each year the manufacturing sector sheds jobs, and unemployment is on the increase, even when the economy expands. Nonetheless, the close link between the labor market and the goods market has not been broken. The false impression that employment changes are rather independent of output changes arises basically for one reason: every year there are technical and organizational innovations which raise productivity; therefore, the economy must expand by 2 percent just to preserve the number of jobs in the economy. In the manufacturing sector the pressure to rationalize is particularly great. To sustain the level of employment, output needs to grow by 4½ percent per year. Since this is rarely the case, employment in manufacturing has been falling for many years; this trend is likely to continue into the future. Over the last two decades nothing has changed with regard to the tight relationship between economic growth and employment. The employment intensity of growth has not diminished; in other words: given the same rate of economic growth, productivity advances are just as high as in earlier periods. To be sure, the manufacturing sector has been characterized by a surge in productivity over the last two years, but this phenomenon reflects the recession rather than a long-term trend. The battle against unemployment is rendered difficult not so much by the acceleration in productivity growth, but by the relatively low long-term growth and the high increase in labor supply. If economic growth can be accelerated by 1 percentage point, employment will rise by 0.4 percentage point (some 12,000 persons). The effect of increases in the labor supply has often been underestimated: even though the average age of retirement has fallen rapidly, the supply of persons active in the labor market has risen by at least 1 percent per year over the last fifteen years, with almost half of the increase due to the inflow of foreign workers. Therefore, a rate of economic growth of 3 percent would be needed to stabilize the rate of unemployment in the long term. This relation certainly also reflects structural imbalances. The rise in unemployment has been especially pronounced in manufacturing. In the service sectors and in the construction industry many new jobs were not filled with the unemployed but with people from the "hidden reserve" and from abroad. The steep rise in labor supply explains why unemployment has changed so little, even though employment has reached higher and higher levels. To lower unemployment, higher economic growth or a reduced increase in the labor supply is needed. The possibilities of reducing unemployment through an increase in the labor intensity of growth are, as recent experience shows, rather limited.

Growth and Unemployment

Factor Shares, the Price Markup, and the Elasticity of Substitution Between Capital and Labor

We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these di.erent equilibrium paths. We use this model to argue that, in contrast to the US, those fiscal policies followed by most of the European countries after the shocks of the 1970's may have played a central role in generating hysteresis.

/pdf/unemployment-growth-and-fiscal-policy-new-insights-on-the-41yzdlg86a.pdf

Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis

Growth, unemployment and wage inertia

. Existing literature has studied the growth effects of fiscal policy in models with full-employment. The aim of this paper is to study these growth effects in an endogenous growth model with unemployment and compare them with the effects obtained when there is full-employment. To this end, we assume that unemployment arises due to the existence of unions. We also assume that the government finances, by means of income taxes, both public capital and an unemployment benefit. Public capital increases total factor productivity and modifies the elasticity of the labor demand. We show that the effects of fiscal policy on both employment and growth crucially depend on the relation between this elasticity and public capital.

Growth, unemployment and public capital

This paper analyses the e?ects on employment of increasing the stock of public capital. To this end, we derive a wage equation so that wages are endogenized. This allows us to show that, by means of a higher elasticity of labour demand with respect to wages, a rise in public capital increases employment. The estimation of a structural model for the Spanish private sector tests and con?rms empirically this relationship. The results show that an increase in public capital has a signi?cant and positive direct in- ?uence on employment, and indirect e?ects derived from lower wages and higher economic growth. Finally, we undertake a simulation exercise to assess the long run e?ects on employment and economic growth of increasing public capital.

/pdf/employment-and-public-capital-in-spain-1fpf1xvzgp.pdf

Employment and Public Capital in Spain

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