NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hysteresis and the European Unemployment Problem

Olivier J. Blanchard, Lawrence H. Summers

NBER Working Paper No. 1950 (Also Reprint No. r0808)
Issued in June 1986
NBER Program(s):   EFG   ITI   IFM

European unemployment has been steadily increasing for the last 15 years and is

expected to remain very high for many years to come. In this paper, we argue that

this fact implies that shocks have much more persistent effects on unemployment than

standard theories can possibly explain. We develop a theory which can explain such

persistence, and which is based on the distinction between insiders and outsiders in

wage bargaining. We argue that if wages are largely set by bargaining between

insiders and firms, shocks which affect actual unemployment tend also to affect

equilibrium unemployment. We then confront the theory to both the detailed facts of

the European situation as well as to earlier periods of high persistent unemployment

such as the Great Depression in the US.

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Document Object Identifier (DOI): 10.3386/w1950

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