Unemployment

Massachusetts Institute Of Technology, Cambridge MA

Investigators

Abstract

This project extends the investigator's work on unemployment in four directions. The first part continues work on unemployment in continental Western Europe. Quantitative time series are constructed for various French labor market institutions and analyzed in order to understand the role of changes in the political and economic environments affecting them. The project explores the role of trust in a society in affecting the operation of labor markets. It explores differential wage and unemployment history in Ontario and Quebec, particularly the role of political and cultural conflict in the latter province. And it explores why the labor share fell in Europe in the last decades of the twentieth century. The second returns to the evolution of unemployment in Central and Eastern Europe. The project studies why unemployment in many of the previously socialist economies has remained so high. This is in spite of the fact that institutions have become "employment friendly," i.e., that unemployment insurance is meagre and legal restraints on firing are few. According to accepted labor theory, this should reduce the unemployment rate. Since labor market institutions have been imported from the West without the predicted outcomes, other aspects must be involved. This project studies various factors that may contribute to mismatch between the characteristics demanded by employers and those supplied by prospective workers. The third extends earlier normative work on labor market institutions, especially on the design of unemployment insurance and employment protection. In past work, Jean Tirole and the investigator have analyzed these issues in a static context; the justification was to clarify the role of a various imperfections, starting from a simple benchmark. They now want to introduce dynamics in a number of dimensions. More specifically, they will extend their work shifting funding of unemployment benefits from payroll taxes to a layoff tax, in exchange for reduction in the legal protections workers enjoyed against termination. The fourth would continue work on monetary policy and the labor market. In recent work, Jordi Gali and the investigator have shown how the presence of imperfections in the labor market substantially modifies the conclusions of the standard New-Keynesian model with respect to optimal monetary policy. They are working further, both on the microfoundations, and on practical issues such as the optimal response to movements in the price of oil. The work described in the proposal can make a substantive intellectual contribution, namely a better understanding of the factors behind variations in unemployment and the work can make a substantive broader contribution, namely help in the design of better structural and macro policies.