Abstract
To an economist a neo-classical view of the world rests primarily on the idea that agents making transactions on various markets do so in such a way as to further their own self interest. This idea is central to both macro and micro views of the economy. Macro-economics is concerned with attempts to explain the movements in aggregate economic quantities, for example the total number of unemployed at a particular date. Microeconomics, on the other hand, focuses on the ways in which a single household (or individual) might respond to the economic environment they are in.
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Notes
See Chapters 2 and 3 of Layard, Nickell and Jackman (1991) for a review.
Also relevant will be the ease with which benefits may be claimed, i.e. the severity of any ‘work test’ which the unemployed must satisfy to be eligible for benefit.
There is evidence to suggest that wage bargaining in the United Kingdom, and in a number of other OECD countries, has tended to become more decentralized in recent years. See Beatson (1995) for a review.
Calmfors and Forslund (1991) point out a potentially offsetting feature of active labour market programmes, which is that by reducing the expected duration of unemployment for job losers they may actually serve to increase the degree of ‘wage pressure’. They show further that, in Sweden, spending on active labour market programmes has had a strong positive effect on the level of real wages.
In more recent work, Jackman, Layard and Nickell (1996) extend this analysis to cover the period 1989–94.
Much attention in the literature has focused on the role of the share of the long-term unemployed in the unemployment stock as a potential contributor to increased ‘wage pressure’ and a reduction in the flexibility of wages in response to changes in unemployment. In practice, however, the proportion of long-term unemployment is not an exogenous variable but is itself determined by more fundamental features of the labour market such as the generosity of the benefit system, the structure of wage bargaining and the scale of spending on active labour market programmes (see Heylen, 1992).
The other countries examined include the UK, the USA, Australia, Canada, West Germany and Spain
Though the relative unemployment rate of unskilled workers fell significantly in many countries during the early 1990s recession (Nickell and Bell, 1995).
Grubb, Jackman and Layard (1983) investigate the possibility that the productivity slowdown of the early to mid 1970s, associated with the OPEC induced rise in oil process, may have had a temporary effect in raising unemployment as workers continued to press for wage increases in line with previous levels of productivity growth.
Equation (6) also implies that even if the inflation rate is constant, unemployment may deviate from u*, so that, strictly speaking, u* may no longer be thought of as the NAIRU. Layard, Nickell and Jackman suggest, however, that u* may be thought of as the long-run NAIRU, whilst the unemployment rate given by equation (6) when the inflation rate is constant may be interpreted as the short-run NAIRU.
As long as price-setting behaviour is influenced by the unemployment rate, unemployment will still exhibit a tendency to return to equilibrium. However, as we have already observed, the relationship between prices and unemployment may be relatively weak, so that deviations from the equilibrium rate of employment are likely to be highly persistent.
These have the form (Uf’ Vf)λ(Um’ Vm)1-λ where the Vs represent the outside options of the individuals. Often these are thought of as being the utility attainable as a single individual. Again the weighting parameter λ can be seen as a power parameter
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Barmby, T., Robson, M. (1998). Neo-Classical Perspectives on Unemployment and Labour Supply: The Macro Environment and Micro Responses. In: Wheelock, J., Vail, J. (eds) Work and Idleness. Recent Economic Thought Series, vol 66. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-4397-4_3
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