Structural Slumps Research Articles

Unemployment Hysteresis in African Oil Exporting Countries: Evidence from Fourier Unit Root Test

This study investigates the stochastic properties of unemployment rate in top ten African oil exporting countries, by examining whether the high unemployment rate in these countries are mean reverting or non-stationary. Using annual data spanning between 1991 and 2023, the study employs a battery of unit root tests, namely, Classical ADF, Fourier ADF (FADF), ADF with Structural Break (ADF-SB) and Fourier ADF with Structural Break (FADF-SB) to test which of the hypothesis of unemployment (natural rate hypothesis, hysteresis hypothesis and structural slump hypothesis) do the unemployment behaviours in African oil exporting countries actually belong to. Findings from the study reveal the superior functionality of FADF-SB over the other unit root tests, stemming from the ability of the ADF model laced with both Fourier and Structural Break to revert the high unemployment rates of all the reviewed countries to equilibrium. Based on the findings in this study, it is therefore concluded that the characteristics of unemployment rate in African oil exporting countries align with and support the structural slump hypothesis of unemployment and thereby recommended that the structural factors should be modelled in the unemployment trend of their economies.

The Greek crisis: a story of self-reinforcing feedback mechanisms

Abstract While there seems to be a well-established consensus about the underlying causes to the Greek crisis, less is known about internal and external transmission mechanisms that ultimately caused unemployment to increase rapidly over this period. Motivated by the structural slumps theory in Phelps (Structural slumps, 1994), the paper attempts, therefore, to uncover the dynamic mechanisms behind prices, interest rates, and external imbalances that contributed to the severity and the length of the crisis. The authors find that the strongly increasing real bond rate and unemployment rate together with an persistently appreciating real exchange rate and a deterioration of competitiveness in the eurozone have contributed to persistently growing structural imbalances in the Greek economy. As the lack of confidence in the Greek economy grew steadily, the scene was set for a monumental structural slump. Over the crisis period, all variables exhibited self-reinforcing feedback adjustment somewhere in the system except for inflation rate. Unemployment took the burden of adjustment when the bond rate sky rocketed, competitiveness deteriorated, and confidence fell.

The Phillips curve and the role of monetary policy in Chile

ABSTRACTIn this paper, the empirical analysis finds that the dynamics of inflation and unemployment can be described by a Phillips curve when allowing for a positive co-movement between trend-adjusted productivity and unemployment. This suggests that improvements in productivity have been achieved by laying off the least productive part of the labor force. Furthermore, the natural rate of unemployment is a function of the long-term interest rate, indicating that monetary policy is not completely neutral in the long run. This result rejects the natural rate hypothesis and, at the same time, provides empirical support for the structural slump theory in a world of imperfect knowledge. The recent theory of imperfect knowledge economics (IKE) seems to address the problem that many economic models lack: persistence in the observed data. By combining IKE and the structural slumps theory it is possible to obtain predictions that are theoretically and empirically consistent.

The Greek Crisis: A Story of Self-Reinforcing Feedback Mechanisms

While there seems to be a well established consensus about the underlying causes to the Greek crisis, less is known about internal and external transmission mechanisms that ultimately caused unemployment to increase rapidly over this period. Motivated by the structural slumps theory in Phelps (1994), the paper attempts, therefore, to uncover the dynamic mechanisms behind prices, interest rates, and external imbalances that contributed to the severity and the length of the crisis. We find that the strongly increasing real bond rate and unemployment rate together with an persistently appreciating real exchange rate and a deterioration of competitiveness in the eurozone have contributed to persistently growing structural imbalances in the Greek economy. As the lack of confidence in the Greek economy grew steadily, the scene was set for a monumental structural slump. We find strong evidence of (i) a Phillips curve relation with a non-constant natural rate being a function of relative costs and the real exchange rate; (ii) a vicious circle of strongly increasing bond rate and unemployment rate; and (iii) a relation associating confidence with the development of relative costs and the real exchange rate. Over the crisis period, all variables exhibited self-reinforcing feedback adjustment somewhere in the system except for inflation rate. Unemployment took the burden of adjustment when the bond rate sky rocketed, competitiveness deteriorated, and confidence fell.

U.S. Monetary Policy and the Prospective Structural Slump

It was a huge mistake to see monetary policy as a static problem of engineering the desired balance between unemployment and inflation. The cyclical phases of economic expansion and contraction do not repeat themselves the same way twice in a row, so the monetary and fiscal remedies that worked last time should not work this time.

Imperfect Knowledge, Asset Price Swings and Structural Slumps: A Cointegrated VAR Analysis of Their Interdependence

This paper discusses interactions between speculative behavior in the currency markets and aggregate ‡uctuations in the real economy. It builds on the Structural Slumps theory in Phelps (1994) and the recent theory of Imperfect Knowledge Economics in Frydman and Goldberg (2007). The former emphasizes real interest rates and real exchange rates as potentially important determinants underlying the persistent ‡uctuations in aggregate activities, and the latter provides the conditions under which speculative behavior in currency markets generates such persistence. The paper argues that by combing the two theories we can shed new light on the two-way interdependence between persistent swings in asset markets and persistent ‡uctuations in the real economy. In particular, we may improve our understanding of the mechanisms behind the long recurrent spells of high unemployment that continue to mar our economies. � The views in this paper are strongly in‡uenced by previous and ongoing research with Roman Frydman, Michael Goldberg and Soren Johansen. I am deeply grateful to Roman and Michael for sharing with me their profound insight in international macro and how imperfect knowledge economics can resolve its many empirical puzzles and to my son, Mikael Juselius, for numerous valuable comments on an early version of this paper.

Asymmetric adjustment from structural booms and slumps

The connection between booms and slumps in economic activity and stock markets is explored with US and UK data. Based on Phelps [Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets. Harvard University Press, Cambridge, MA, 1994] and Phelps and Zoega [Economic Policy 32 (2001) 85–126], the cointegrating relationship between stock returns and economic activity requires asymmetric adjustment in the short-run.

Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps

This paper explores a model of wage adjustment based on the assumption that information disseminates slowly throughout the population of wage setters. This informational frictional yields interesting and plausible dynamics for employment and inflation in response to exogenous movements in monetary policy and productivity. In this model, disinflations and productivity slowdowns have a parallel effect: They both cause the path of employment to fall below the level that would prevail under full information. The model implies that, in the face of productivity change, a policy of targeting either nominal income or the nominal wage leads to more stable employment than does a policy of targeting the price of goods and services. Finally, we examine U.S. time series and find that, as the model predicts, unemployment fluctuations are associated with both inflation and productivity surprises.

Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?

It is widely agreed that the natural unemployment rate recovered strongly in several OECD economies in the 1990s while not yet in the others. This paper draws on models by the authors endogenizing the path of the natural rate in order to trace the causes and apportion the credit. The results suggest that the five structural reforms of the labor market urged by the OECD Secretariat were effective and account for some of the recovery where adopted. However, the paper sees most of the recoveries as largely the emergence from structural slump to a structural boom--a boom brought by revived investment in employees, customers and fixed capital. Behind this revival is a recovery of business-asset valuations resulting from improved expectations for productivity growth and, judging by the stock market, hopes for a future lift in business earnings that exceeds extrapolations of the past--both driven by the new economy.

Relative Unemployment in Canada and the United States: An Assessment

The paper reaches three conclusions about causes of the Canada-US unemployment gap. First, pure definitional differences are not very important. Second, changes in the unemployment insurance system in Canada during the 1970s and in the United States during the 1980s caused changes in jobless persons' responses to labour market surveys. Jobless Canadians became more likely to search for work during the 1970s and 1980s; jobless Americans became somewhat less likely to seek work in the 1980s and early 1990s. Third, increased relative Canadian unemployment in the 1990s is genuine, reflecting either a cyclical or structural slump in the Canadian job market.

THE NATURAL RATE: AN ATTRACTOR FOR ACTUAL UNEMPLOYMENT, OR AN ATTRACTEE?

AbstractThis article reviews the contributions of Richard Layard, Stephen Nickell and Richard Jackman, The Unemployment Crisis, Oxford U.P., 1994; and Edmund S. Phelps, Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest and Assets, Harvard U.P. 1994 to the literature on the determinants of the equilibrium rate of unemployment. The key issue is whether the doctrine of monetary neutrality, which is the hallmark of the natural rate of unemployment hypothesis investigated in the two volumes under review, is tenable with regard to equilibrium unemployment. The conclusion is that the influence of actual on equilibrium unemployment violates the neutrality axiom, and that the natural rate is as much an attractee as attractor for actual unemployment.

The natural rate moves! A review essay of Edmund Phelps' structural slumps

This review essay of Edmund Phelps' Structural Slumps.The Modern Equilibrium Theory of Unemployment, Interest and Assets argues thatStructural Slumps is an important book, which enriches neoclassical economics and has substantive things to say about the persistence of high unemployment rates in many industrial countries. However, the book does not substantiate Phelps' own claims that the structural approach represents a new paradigm in economic theory and that the new paradigm is the only convincing explanation for persistently high levels of unemployment. With respect to the first claim it is argued that the structuralist approach is not fundamentally different from neo-classical macroeconomics. With respect to the second claim it is illustrated that the empirical evidence is inconclusive as far as the alleged superiority of the structuralist approach is concerned.

Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets

Preface Introduction Concepts and Agenda Modern Equilibrium Theory Contrary Postulates of the Neoclassical Schools The Labor-Market Equilibrium Locus in Modern Models The Product-Market Equilibrium Locus and Partial-Equilibrium Unemployment Determination Capital-Market Equilibrium, Neoclassical and Modern, and General-Equilibrium Employment Key Factors in the Structuralist Theory of Unemployment Fluctuation The Closed Economy: Working Models A Turnover-Training Model A Customer-Market Model A Two-Sector Fixed-Investment Model Synthesis of the Single-Economy Theory Small and Large Open Economies: Working Models International Linkages through Investment in Employees International Linkages through Investment in Customers International Linkages through Investment in Fixed Capital Synthesis of the Global-Economy Theory Microtheoretic Formulations, Modern and Neoclassical Interest and Wealth in the Microeconomics of the Incentive Wage and Equilibrium Unemployment Structural Shifts and Economic Activity in Neoclassical Theory Empirical Evidence Econometric Tests of the Theory: A Postwar Cross-Country Time-Series Study A Concise Nonmonetary History of Postwar Economic Activity Concluding Notes Notes on Classicism, Etc. Economic Policies to Which the Structuralist Theory Might Lead Notes Glossary of Frequently Used Symbols Index

Structural slumps: the modern equilibrium theory of unemployment, interest, and assets

Structural slumps: the modern equilibrium theory of unemployment, interest, and assets