Assumption Of Full Employment Research Articles

In Search of Exchange Rate Undershooting in Pakistan

Exchange rate behaviour does not follow very obvious and predicted pattern. Many attempts have been made to predict its behaviour as much as possible. This research re-examines the Dornbusch’s model of exchange rate overshooting caused by price rigidities. Dornbusch’s assumption of full employment in economy has been violated in this research which creates the possibility of exchange rate undershooting. In response to positive monetary shock, interest rate decreases and exchange rate undershoots its long run equilibrium. This research explains the dynamics of anti-intuitive exchange rate undershooting. Apart from theoretical formations of exchange rate undershooting, this research also analyses Pakistani data for exchange rate undershooting or overshooting in response to increase in money supply. Quarterly data of twenty three years for exchange rate, nominal interest rate, price, real output and money have been taken and vector autoregressive technique has been used. Evidence of exchange rate undershooting in response to positive money supply shock was found. It also gives an important insight into policy making by identifying some probable behaviour of exchange rate.

Taxes and unemployment

AbstractThe present model revisits the issue of unit and ad valorem taxes in a model of monopolistic competition. It is shown that if the assumption of full employment is relaxed, then taxation can increase employment conditionally when the elasticity of substitution among varieties is low. Moreover, with the same level of initial unemployment, ad valorem tax is better than unit tax in terms of employment, when the targeted tax revenue is relatively high and scale economies are strong.

The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide

Abstract Supporters of the Austrian School of Economics and a number of empirical studies have claimed that the increasing number of “zombie” companies is a supply-side reason for the low growth rates in Europe. Often, these studies cite empirical findings for Japan to justify their claims, and conclude that in order to overcome the stagnation phase, bad investments and thus zombie companies should be eliminated from the production process. However, such creative destruction can only prove beneficial if innovative and highly productive companies replace these zombies under full utilization of resources. We ask whether findings on the zombie problem from empirical studies on Japan can be applied directly to the current European situation. We present facts contradicting the idea that productive companies would not have been able to exploit their growth potential in (southern) Europe, allegedly because they could not have found suitable employees since these were tied up in zombie companies on a massive scale. Even under the false assumption of full employment in Europe, existing empirical work shows that the losses due to zombification are only around 3.6 % of GDP over 10 years. In our calculation, that would be 100 euros per capita and year currently far too little to call for a drastic change in ECB monetary policy towards past long-run average short-term rates. JEL Classification: B25, B53, D24, E22, E24, E52, E32, E52, G23, J24

Power over Profits

Contemporary political economy debates tend to assume that an increase in productivity automatically leads to an equal increase in workers’ wages. This assumption shapes the way that many scholars think about economic globalization, as well as domestic policy reforms. This assumption is particularly widespread in the field of international political economy, where it is implicitly incorporated through the use of neoclassical economic models. Rather than explore the distributional struggle between capital and labor, these models use the assumption of full employment to predict that policies that increases worker productivity automatically leads to an equal increase in workers’ wages. In contrast, this article argues that the degree to which wages increase along with productivity depends on the domestic institutions that protect workers’ rights to act collectively. This article tests the relationship between worker productivity and wages by analyzing data from twenty-eight manufacturing industries, in 117 countries, from 1986 to 2002. The results demonstrate that the degree to which an increase in worker productivity leads to an increase in wages depends on a country’s level of protection for labor rights.

Human Capital and Economic Growth: A Three Stage Least Squares Approach

It can never be overemphasized that human capital is the engine of growth of an economy. No nation can develop beyond its investment in education in particular. Growth economists in affirmation have explained that the differences in the per capita income of countries cannot be explained in isolation from the differences in human capital development. For early classical economists, economic growth had always been closely linked with physical capital, to the neo classicals - human capital, while the endogenous growth scholars linked economic growth with technology, which is a function of human capital. We conclude then that growth differences among nations can be better understood by studying the differences in human capital investment. In Nigeria, available data makes it clear that there has been severe under investment in education and health sectors. The government is far from complying with the UNESCO’s 26% and African Leaders’ 15% minimum budgetary benchmark to both sectors respectively. This paper therefore examines the role of government investment in human capital on economic growth of the Nigerian economy. Using time series data from 1980-2010, the paper adopted the Ordinary Least Squares (OLS) and 3 Stage Least Squares analytical technique, in an Augmented Human Capital Solow theoretical framework. The study found that human capital alongside with technological development and population growth has a positive relationship with growth of the Nigerian economy. The model confirmed that adequately trained and employed population enhances the growth of the economy. However, high mortality and unemployment rate remain the greatest challenge to education in Nigeria. It further revealed that the Nigerian experience does not support Solow’s hypothesis of high population growth/low productivity relationship. When Solow’s full employment assumption is relaxed, high population growth rather enhances productivity. The study also found that education has the greatest marginal impact on life expectancy. The study interestingly makes it clear that although the private sector benefits maximally from an educated population, she may not invest adequately in human capital development. However, both the rent- seeking and non-rent seeking behaviour of economic agents are estimated to impact positively on economic growth of Nigeria directly or indirectly. The study therefore recommends an urgent need for government to strategically shift her investments towards the continuous development of effective and efficient human capital. This will serve as the foundation for an effective development of an organized private sector.

Real exchange rate, productivity and labor market frictions

We extend the classic Balassa–Samuelson model to an environment with search unemployment. We show that the classic Balassa–Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market matching efficiency affects the strength of the structural relationship between the real exchange rate and sectoral productivity through influencing labor’s choice between employment and unemployment as well as movement across sectors. When the relative labor market matching friction is high, search unemployment is high and the standard Balassa–Samuelson effect may not hold. Empirical evidence supports our theory: controlling for differences in labor market frictions across countries provides a better fit in estimating the Balassa–Samuelson effect.

Real Exchange Rate, Productivity and Labor Market Rigidities

We extend the classic Balassa-Samuelson model to an environment with search unemployment. We show that the classic Balassa-Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market rigidities affects the strength of the structural relationship between real exchange rate and sectoral productivity and in some circumstances, the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for the difference in labor market rigidities across countries provides a better fit in estimating the Balassa-Samuelson effect.

Marshall’s vs Wicksell’s Theory of the Cumulative Process

It has generally not been emphasized that both Marshall and Wicksell used an identical mechanism based on the “cumulative process” to explain how inflation would occur during an expansionary cycle in the relatively short period. The differences between their versions of the cumulative process will be emphasized, including their respective interest mechanisms. Then, it will be shown that although Wicksell put the assumption of full employment and inflation on center stage, Marshall, in analyzing how an economy could escape a troubling depression, described how new employment, as well as a moderate inflation would occur during the upward cycle. Marshall’s analysis of cycles was much more realistic than Wicksell’s.

Full Employment: A Classical Assumption or Keynes's Rhetorical Device?

Following Keynes's attribution of assumption of full employment to classics in General Theory (1936), it has become standard practice particularly in macroeconomics textbooks to identify classical economics' with that assumption. Among intermediate-level texts that repeat attribution are Abel and Bernanke [1, 426], Baily and Friedman [6, 443-44], Dornbusch and Fischer [14, 200-201], Froyen [17, 55], Galbraith and Darity [18, 44-45], Gordon [19, 165], McElroy [45, 41-51], and Sachs and Larrain [62, 55].2 Case and Fair [10, 349-50], Colander [12, 211], Samuelson and Nordhaus [63, 277], and Slavin [65, 219-20] are among introductory-level texts that state same claim. However, devising appropriate policies to raise standard of living, especially for poor, and also increase employment opportunities for a growing population were principal focus of classical economists. See, for example, Smith [66, 1:359-60, 372, 2:208], Ricardo [58, 1:386-97], Malthus [40, 231-40, 351-60], and Mill [46, 2:356-58]. Writing in tradition of classics, Alfred Marshall also was equally concerned about fate of poor and need to identify policies that would promote economic growth and their welfare.3 Indeed, Keynes recalls Marshall's own explanation of his transition from mathematics to economics as being influenced by his visits to the poorest quarters of several cities and [having] walked one street after another, looking at faces of poorest people on his vacations.4 Pigou [53] also firmly denies having employed full employment assumption as Keynes alleges. Indeed such an assumption would also be inconsistent with title of Pigou's 1933 book, The Theory of Unemployment. On other hand, Keynes's efforts to contrast classical arguments with his own charac

Effective Demand and Income Distribution in The General Theory

The paper looks at income distribution in a short-period context which is similar to that of Keynes’s General Theory. The approach to distribution is different from the one Kaldor adopted in the 1950s: no assumption of full employment is made. The conclusions concerning income distribution which can be inferred from the General Theory depend on Keynes’s assumptions concerning the behavior of prices and the real wage rate with respect to changes in output. In the paper these assumptions are criticized and the implications in terms of distribution are examined. In 1938-1939, Keynes’s conjectures about the relation between output level and the real wage rate were criticized by Dunlop, Tarshis, and, by implication, Kalecki. In his rejoinder, Keynes accepted some of these criticisms and suggested a new approach to income distribution that differs from Kaldor’s and is close to the one adopted by Kalecki and developed by Joan Robinson.

Capital Usage and Output Growth in Multiregional Multisectoral Models: An Application to the Italian Case

CAMPISI D. And NASTASI A. (1993) Capital usage and output growth in multiregional multisectoral models: an application to the Italian Case, Reg. Studies 27, 13–27. This paper extensively discusses the theoretical and practical difficulties arising in the implementation of dynamic input–output models in a multiregional framework. In particular, since the standard capital accumulation pattern produces implausible results (negative outputs), an economically consistent dynamic formulation requires the abandonment of the restrictive assumption of full employment of capital. The resulting model is applied to the Italian economy within a biregional (north-south) framework. Alternative numerical simulations, based on different assumptions on the sectoral maximum admissible growth rates of productive capacity, are finally used to verify the robustness of the model. CAMPISI D. Et NASTASI A. (1993) L'emploi du capital et la croissance de l'output dans le cadre des modeles multisectoriels multiregionaux: une applicat...

Measuring Terms of Trade of LDCS: A Different Approach

The so called Third World Debt Crisis has occupied the center stage of the literature regarding economic development in the 80's. This has pushed aside a number of other problems that Less Developed Countries (LDC's) have in their economic relations with the Developed Countries (DCs). Nevertheless, these are real problems and those countries suffer from their consequences. Deterioration in the terms of trade of LDC's is one issue that has been, in the 50's and 60's, in the center of controversy. The question has been lingering even prior to the WWII. After the World War II the possibility of nations being worse off as a result of a deterioration in the terms of trade was examined more thoroughly. Following the publication in 1949 of the United Nations study, Relative Prices of Exports and Imports of Underdevel oped Countries, some economists began to talk about the deterioration in the course of a century of the terms of trade for a certain category of products. Raul Prebisch (1950) and Hans Singer (1950) argued that the terms of trade were deteriorating against primary products. M. Ellsworth and F. V. Meyer, among others, challenged the reliability of the statistical data on which these observations were based. In 1956 Kindleberger's monumental work, The Terms of Trade: A European Case Study, was published. In this book he concludes: We have found that there is something to the notion that the merchandise terms of trade tend to move against underdeveloped countries, but little in the usual corollary that they move against manufactures and in favor of primary products. The distinction is important. According to Arthur Lewis (1954), the existence of a dual economy, a subsistence sector side by side with a capitalist sector, keeps real wages in LDCs down and causes a deterioration in the terms of trade of these countries. Surplus labor abounds in the tradi tional sector. The productivity of labor is very low, and production is at the subsistence level. This is due to the fact that in the countries that produce tropical crops, there is a subsistence sector that will provide enough excess labor to prevent increases in real wages. Thus the neoclassical assumption of full employment does not hold for one partner, the LDC. Here, the marginal productivity of labor in the subsistence level is almost zero and its supply is practically unlimited. Arghiri Emmanuel questions Ricardo's as sumption of perfect mobility of factors of production within each country, and perfect immobility of these factors among countries. He argues capital is internationally mobile while labor is immobile. This is what Emmanuel (1976) considers present-day reality. If this is the case, then exchange is unequal because of differences in wages, for the same type of labor, which will bring about a transfer of value from lower real wage countries to higher real wage ones.

On the Use and Misuse of Input-Output Based Impact Analysis in Evaluation

Abstract: Estimates of economic activity generated and jobs created that are derived using input-output analysis are often presented in program evaluations and confused with the benefits resulting from the program. Two such cases are presented as examples. We argue that for two main reasons this type of analysis constitutes a misuse of input-output analysis. First, input-output estimates generated using the Keynesian closed versions of input-output models are biased upwards because they ignore the price and financial feedbacks that tend to reduce multipliers in macroeconomic models. Second, and more important, it is inappropriate to consider induced effects resulting from a particular program in isolation, because such effects can only be properly considered in the aggregate at the level of overall stabilization policy. In this paper we contend that cost-benefit analysis, with its assumption of full employment, is the most appropriate tool for analyzing the benefits resulting from particular programs. Input-output analysis should be confined to providing estimates of the industrial or regional breakdown of the direct impact of a program or of the employment impacts of program spending. It should not be used to generate Keynesian multipliers.

Liquidity Preference and Loanable Funds : Stock and Flow Analysis

Despite Hicks' demonstration nearly twenty years ago of the equivalence between liquidity-preference and loanable-funds theories of interest, thte debate on this issue continues to fill the pages of the journals. Indeed, on this issue the 1950's have seen a revival of the polemics of the 1930's. It is not my purpose here to provide a systematic survey of this revival. Instead I shall restrict myself to two arguments that have been advanced in implicit or explicit rebuttal of Hicks' demonstration-and will show why they are invalid. The first argument bases itself on the distinction between stock and flow analysis -and will be discussed in Section 1. The second bases itself on the distinction between static and dynamic analysis-and this will be discussed in Section 2.2 The argument of both these sections is carried out on the assumption of full employment; a generalization-under certain assumptions-to the case of unemployment is presented in Section 3. 1. Let us start with Hicks' classic demonstration.3 This can be restated in the form of the following two propositions: 1 (a) Consider an economy with n goods, consisting of n-2 commodities (inclusive of services), bonds (perpetuities), and money. In the corresponding system of n excess-demand equations, one of the equations is redundant and can be eliminated-that is, if any n-i excess-demand equations are satisfied, the remaining one must also be satisfied. This will be called Walras' Law. (b) It follows that a general-equilibrium analysis of the commodity and bond markets yields exactly the same equilibrium rate of

Public Investment in Canada

Prior to 1930 discussion of public investment was conducted largely on the basis of an assumption of full employment within a closed economy. Consequently it centred around the productiveness of public investment as opposed to that undertaken in the privately-operated sector of the economy, the appropriate methods of financing the projects undertaken, and the legitimate spheres of operation of public bodies. The usefulness of public investment projects was believed, in the main, to be confined to their long term contribution to the productiveness of the economy. In practice, even well into the nineteen-thirties, governments, with exceptions, undertook public projects when finances were buoyant and borrowing relatively easy, and curtailed them, in attempts to balance budgets, when depression became serious. After 1930 both in the thought and practices of some central governments and in economic writing the pendulum swung the other way. Main emphasis was laid on the current employment and income giving effects of public investment. This change in emphasis received additional impetus after the advent of The General Theory of Employment, Interest and Money when economic discussion became much more concerned with the level of employment than the distribution of the factors of production among alternative uses. The transfer of attention from the long term aspects of public projects to their effect on current employment and income maintenance was accompanied by the shortcomings of practice and thought which are inevitable in an undeveloped field. While a good deal was written and spoken about the desirability of well thought out and well planned investment, insufficient attention was given to its attainment and in practice resort was had to many undertakings whose value, from either a short or long term viewpoint, was dubious. The shortcomings were largely associated with failure to cope adequately with the institutional and administrative problem involved. Further, there was a penchant for fastening on single devices to meet the overall employment problem.

Public Investment in Canada

Prior to 1930 discussion of public investment was conducted largely on the basis of an assumption of full employment within a closed economy. Consequently it centred around the productiveness of public investment as opposed to that undertaken in the privately-operated sector of the economy, the appropriate methods of financing the projects undertaken, and the legitimate spheres of operation of public bodies. The usefulness of public investment projects was believed, in the main, to be confined to their long term contribution to the productiveness of the economy. In practice, even well into the nineteen-thirties, governments, with exceptions, undertook public projects when finances were buoyant and borrowing relatively easy, and curtailed them, in attempts to balance budgets, when depression became serious.After 1930 both in the thought and practices of some central governments and in economic writing the pendulum swung the other way. Main emphasis was laid on the current employment and income giving effects of public investment. This change in emphasis received additional impetus after the advent of The General Theory of Employment, Interest and Money when economic discussion became much more concerned with the level of employment than the distribution of the factors of production among alternative uses.The transfer of attention from the long term aspects of public projects to their effect on current employment and income maintenance was accompanied by the shortcomings of practice and thought which are inevitable in an undeveloped field. While a good deal was written and spoken about the desirability of well thought out and well planned investment, insufficient attention was given to its attainment and in practice resort was had to many undertakings whose value, from either a short or long term viewpoint, was dubious. The shortcomings were largely associated with failure to cope adequately with the institutional and administrative problem involved. Further, there was a penchant for fastening on single devices to meet the overall employment problem.