Unemployment and Productivity in the Long Run: the Role of Macroeconomic Volatility

By Paolo Surico, Luca A Ricci, Pierpaolo Benigno

November 1, 2010

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Paolo Surico, Luca A Ricci, and Pierpaolo Benigno. Unemployment and Productivity in the Long Run: the Role of Macroeconomic Volatility, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.

Subject: Productivity, Real wages, Unemployment, Unemployment rate, Wage rigidity

Keywords: Productivity growth, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/259
Stock No:

WPIEA2010259
ISBN:

9781455209590
ISSN:

1018-5941

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