Core Macroeconomics, Hilary Term 2012

Week 1: Review of IS-LM / AS-AD; theories of equilibrium unemployment

In preparation for this week's tutorial, you should review the IS-LM / AS-AD model you studied last year. Carlin & Soskice (C&S) do this in Ch. 2. Our main focus this week is on the "competing claims" model of the labour market, in which there can be (non-frictional, involuntary) unemployment even when the economy is in equilibrium. This understanding of the labour market is at the heart of C&S' macro models. Their Ch. 4 sets out the model.

Readings

Carlin & Soskice, Macroeconomics: Imperfections, Institutions and Policies,
Chs. 1, 2, 4. (Ch. 18 has useful material for your essay, but you'll need to avoid the bits that rely on an international macro model we haven't done yet.)

Nickell, S., L. Nunziata, and W. Ochel, "Unemployment in the OECD since the 1960s: What Do We Know?", Economic Journal, vol. 115, no. 1 (January 2005), pp. 1-27.

You can review the IS-LM / AS-AD framework in the intermediate texts by Mankiw & Taylor, Burda & Wyplosz, or Blanchard. For example, Chs. 3-7 in Blanchard, Macroeconomics (3rd US edition), in which Ch. 6 also deals with the competing claims model of the labour market. D. Romer's Advanced Macroeconomics reviews traditional Keynesian models in a very compressed way in Ch. 5 (in which you could skip the international material).

There are a number of useful, accessible articles in the Journal of Economic Perspectives. The Winter 1997 (vol. 11, no. 1) issue has a symposium on the natural rate of unemployment, with articles by a number of prominent scholars. "What we know and do not know about the natural rate of unemployment," by Olivier Blanchard and Lawrence Katz, has an exposition of the competing claims model. The Autumn issue of the same year has a symposium on European unemployment with articles by Nickell and Siebert. In the Winter 2001 (vol. 15, no. 1) issue, Lindbeck & Snower's article "Insiders versus Outsiders" is worth a read. Finally, Ball & Mankiw have a useful article on "The NAIRU in Theory and Practice" in vol. 16, no. 4 (Autumn 2002).

D. Romer's Advanced Macroeconomics, Ch. 9, offers an exposition of several models of equilibrium unemployment. This material is concise and good, but also a bit challenging and technical.

Essay

Use the "competing claims" model to explain observed variation in unemployment rates among OECD countries. Start with the Nickell et al. reading. Do your best to understand the regression and simulation results there, but don't worry if some of the technical points elude you.