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

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

by Edmund S. Phelps
     
 

ISBN-10: 0674843738

ISBN-13: 9780674843738

Pub. Date: 01/28/1994

Publisher: Harvard University Press

Dissatisfied with the explanations of the business cycle provided by the Keynesian, monetarist, New Keynesian, and real business cycle schools, Edmund Phelps has developed from various existing strands-some modern and some classical—a radically different theory to account for the long periods of unemployment that have dogged the economies of the United States

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Overview

Dissatisfied with the explanations of the business cycle provided by the Keynesian, monetarist, New Keynesian, and real business cycle schools, Edmund Phelps has developed from various existing strands-some modern and some classical—a radically different theory to account for the long periods of unemployment that have dogged the economies of the United States and Western Europe since the early 1970s. Phelps sees secular shifts and long swings of the unemployment rate as structural in nature. That is, they are typically the result of movements in the natural rate of unemployment (to which the equilibrium path is always tending) rather than of long-persisting deviations around a natural rate itself impervious to changing structure. What has been lacking is a "structuralist" theory of how the natural rate is disturbed by real demand and supply shocks, foreign and domestic, and the adjustments they set in motion.

To study the determination of the natural rate path, Phelps constructs three stylized general equilibrium models, each one built around a distinct kind of asset in which firms invest and which is important for the hiring decision. An element of these models is the modern economics of the labor market whereby firms, in seeking to dampen their employees' propensities to quit and shirk, drive wages above market-clearing levels-the phenomenon of the "incentive wage"—and so generate involuntary unemployment in labor-market equilibrium. Another element is the capital market, where interest rates are disturbed by demand and supply shocks such as shifts in profitability, thrift, productivity, and the rate of technical progress and population increase. A general-equilibrium analysis shows how various real shocks, operating through interest rates upon the demand for employees and through the propensity to quit and shirk upon the incentive wage, act upon the natural rate (and thus equilibrium path).

In an econometric and historical section, the new theory of economic activity is submitted to certain empirical tests against global postwar data. In the final section the author draws from the theory some suggestions for government policy measures that would best serve to combat structural slumps.

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Product Details

ISBN-13:
9780674843738
Publisher:
Harvard University Press
Publication date:
01/28/1994
Pages:
440
Product dimensions:
6.66(w) x 9.59(h) x 1.12(d)

Table of Contents

Preface
Introduction1
Pt. IConcepts and Agenda
1Modern Equilibrium Theory9
2Contrary Postulates of the Neoclassical Schools14
3The Labor-Market Equilibrium Locus in Modern Models20
4The Product-Market Equilibrium Locus and Partial-Equilibrium Unemployment Determination33
5Capital-Market Equilibrium, Neoclassical and Modern, and General-Equilibrium Employment49
6Key Factors in the Structuralist Theory of Unemployment Fluctuation59
Pt. IIThe Closed Economy: Working Models
7A Turnover-Training Model69
8A Customer-Market Model86
9A Two-Sector Fixed-Investment Model108
10Synthesis of the Single-Economy Theory145
Pt. IIISmall and Large Open Economies: Working Models
11International Linkages through Investment in Employees169
12International Linkages through Investment in Customers182
13International Linkages through Investment in Fixed Capital211
14Synthesis of the Global-Economy Theory230
Pt. IVMicrotheoretic Formulations, Modern and Neoclassical
15Interest and Wealth in the Microeconomics of the Incentive Wage and Equilibrium Unemployment245
16Structural Shifts and Economic Activity in Neoclassical Theory272
Pt. VEmpirical Evidence
17Econometric Tests of the Theory: A Postwar Cross-Country Time-Series Study311
18A Concise Nonmonetary History of Postwar Economic Activity335
Pt. VIConcluding Notes
19Notes on Classicism, Etc.351
20Economic Policies to Which the Structuralist Theory Might Lead359
Notes377
Glossary of Frequently Used Symbols414
Index417

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