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This 1991 book is a selection of Jacques Drèze's work over the last decade on the topics of lasting unemployment, stagflation and unused capacity. At the theoretical level, the author has contributed to the formulation and analysis of general equilibrium models which allow for price rigidities and excess supply and lend themselves to econometric implementation, thus represents an attempt to integrate micro- and macroeconomics, and to use theory for empirical and policy purposes.
This dissertation analyzes the possibility that high unemployment can be be self-reinforcing through its effects on the distribution of income and, consequently, aggregate demand. The major results of my work demonstrate that these forces can lead to multiple macroeconomic equilibria which are indexed by the level of unemployment. By characterizing low output and employment states as equilibrium outcomes, this thesis provides a coherent theoretical explanation for periods of persistently high unemployment. The key property throughout is non-homotheticity of consumers' preferences, whereby the market demand for goods changes as income distribution changes, even if the total income of all consumers remains fixed. This implies that, unlike in many macroeconomic models, demand cannot be generated from a representative agent and, crucially, that changes in employment along the extensive, as opposed to intensive, margin can have more severe general equilibrium consequences.
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.
This book focuses on the modeling of the transitions in and out of unemployment, given the stochastic processes that break up jobs and lead to the formation of new jobs, and on the implications of this approach for macroeconomic equilibrium and for the efficiency of the labor market. An equilibrium theory of unemployment assumes that firms and workers maximize their payoffs under rational expectations and that wages are determined to exploit the private gains from trade. This book focuses on the modeling of the transitions in and out of unemployment, given the stochastic processes that break up jobs and lead to the formation of new jobs, and on the implications of this approach for macroeconomic equilibrium and for the efficiency of the labor market. This approach to labor market equilibrium and unemployment has been successful in explaining the determinants of the "natural" rate of unemployment and new data on job and worker flows, in modeling the labor market in equilibrium business cycle and growth models, and in analyzing welfare policy. The second edition contains two new chapters, one on endogenous job destruction and one on search on the job and job-to-job quitting. The rest of the book has been extensively rewritten and, in several cases, simplified.
Kalecki's opus has been acknowledged chiefly as a contribution to the theory of distribution and the business cycle. Little attention has been given to the theory of effective demand and to unemployment equilibrium, i.e. to the field traditionally covered by Keynesian economics. This book is an attempt to draw attention to the most innovative core of Kalecki's thought on capitalist economies, which is also strictly interrelated to the history of economic thought. Accordingly, it focuses on the relationships with other theoretical approaches, to methodology and the theory of effective demand and investment, to the theory of distribution and prices, and to the theory of money.
While most standard economic models of international trade assume full employment, Carl Davidson and Steven Matusz have argued over the past two decades that this reliance on full-employment modeling is misleading and ill-equipped to tackle many important trade-related questions. This book brings together the authors' pioneering work in creating models that more accurately reflect the real-world connections between international trade and labor markets. The material collected here presents the theoretical and empirical foundations of equilibrium unemployment modeling, which the authors and their collaborators developed to give researchers and policymakers a more realistic picture of how international trade affects labor markets, and of how transnational differences in labor markets affect international trade. They address the shortcomings of standard models, describe the empirics that underlie equilibrium unemployment models, and illustrate how these new models can yield vital insights into the relationship between international trade and employment. This volume also includes an indispensable general introduction as well as concise section introductions that put the authors' work in context and reveal the thinking behind their ideas. Economists are only now realizing just how important these ideas are, making this book essential reading for researchers and students.