UNEMPLOYMENT, GROWTH, AND FISCAL POLICY: NEW INSIGHTS ON THE HYSTERESIS HYPOTHESIS

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...

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Bibliographic Details
Published in:Macroeconomic dynamics 2006-06, Vol.10 (3), p.285-316
Main Authors: RAURICH, XAVIER, SALA, HECTOR, SOROLLA, VALERI
Format: Article
Language:English
Subjects:
Budgets
Capital stock
Consumption
Economic conditions
Economic growth
Economic models
Economic theory
Employment
Equilibrium
Fiscal policy
Government spending
Growth models
Hypotheses
Interest rates
Labor economics
Labor market
Macroeconomics
Studies
Tax rates
Taxes
Unemployment
Unemployment benefits
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Summary: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 different paths. We use this model to arguea that, in contrast to the United States, those fiscal policies followed by most of the European countries after the shocks of the 1970s may have played a central role in generating hysteresis.
ISSN:1365-1005
1469-8056
DOI:10.1017/S136510050605022X