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The Macroeconomics of Unemployment in the Treasury Macroeconomic (TRYM) Model
Abstract
The paper is essentially in three parts. (A) First it outlines and documents the labour market framework in TRYM and attempts to validate the framework by showing how it can explain certain historical facts such as why unemployment is now much more cyclical than in the 1960s. To further validate the framework, it is compared and reconciled with the labour market specifications in a recent paper by the RBA (Debelle and Vickery 1998). (B) The paper then turns to some of the implications of the framework and what it says about the linkages between wages and unemployment. An important aspect of how a wage change impacts on unemployment under our current monetary policy framework is via the interest rate reaction to the inflation generated by higher nominal wages. The paper therefore compares the monetary policy response in TRYM with that in other Australian macro models. It then looks at the full model response to a wage shock and demonstrates that the interest rate reaction is important in generating the short-term employment response. (C) The paper then looks at the macroeconomic consequences of reducing unemployment, including implications for living standards and macroeconomic aggregates such as national saving and investment. Inter alia the paper touches on what the model has to say about the sources of the increase in unemployment in the 1980s and 1990s. While it is impossible to be precise, the evidence from the model suggests that the observed increase in structural unemployment was only partly due to search effectiveness factors. It seems macroeconomic wage setting and price setting factors (eg institutional/bargaining factors, the fall in productivity growth, decline in the terms of trade, and perverse feedback such as to taxation and to the cyclicality of unemployment itself) played an important role in explaining the level and persistence of unemployment in the late 1980s early 1990s.
... Recent research into the employment equation in Australia has ignored standard hours entirely (Russell & Tease (1991), Phipps & Sheen (1995) and Lewis & MacDonald, 2002)). Some studies have incorporated hours of work into their employment equation but have imposed a long-run elasticity of minus one on the coefficient relating employment to hours (Commonwealth Treasury (1996), Stacy & Downes (1995), Downes and Bernie (1999)). We argue that the relationship is likely to be such that the long run coefficient (elasticity) of the number employed with respect to (standard) hours will be neither zero or minus one, but instead will likely be positive and less than one. ...
... The long-run elasticity 3 of employment with respect to output 4 is 0.75 while the long-run elasticity of employment with respect to the real wage is -0.37 (Russell & Tease, 1991, p 44). 5 Phipps & Sheen (1995) examined total non-farm employment in relation to real nonfarm GDP and real average weekly earnings 6 over the period 1979:1 -1993:3. The elasticity of employment with respect to output is "estimated at just under 0.75" while the elasticity of employment with respect to the real wage "is about -0.7" (Phipps & 1 There have been a number of papers modelling aggregate hours worked (eg Debelle & Vickery (1998) and many papers associated with TRYM, eg Commonwealth Treasury (1996), Downes & Bernie (1999), Stacey & Downes (1995). While these papers are not unrelated to this study we do have as our central focus a single equation modelling the number of people employed, and which does not treat this as simply given by the number of aggregate hours worked divided by average hours worked. 2 Measured as non-farm wages, salaries and supplements plus payroll and fringe benefit tax deflated by the IPD for non-farm GDP. 3 The elasticities we report here for the Russell & Tease paper differ from those reported by Dungey & Pitchford (1998, p 222) who list the elasticities given in Russell & Tease (1991) for the case where unit labour costs are used as an explanatory variable. ...
... Effectively they are imposing a coefficient of zero on average hours in the employment equation. At the other extreme is the employment equation which is implicit in TRYM (Commonwealth Treasury (1996), Downes & Bernie (1999), Stacey & Downes (1995)) where a long-run coefficient of minus one on actual hours worked is imposed on the employment equation. 10 The only recent study of the employment equation for Australia which not only explicitly includes (average) hours but also allows the elasticity of employment with respect to hours to be estimated is by Dungey and Pitchford (1998, p 219-22 and p 233). ...
We model the relationship between hours of work and employment and argue that unless actual hours are varying with a change in ‘standard hours’, actual hours should not appear in the long-run component of an equation for employment. If however standard hours are changing then it is desirable that this variable be incorporated into the employment equation. Our theoretical model yields an expression for the elasticity of employment with respect to standard hours which shows that the elasticity is related to the size of the premium for overtime. Using quarterly data for the period 1966:3 – 2001:3 we estimate a new employment equation for Australia incorporating standard hours of work. We find empirical support for our approach and we provide new estimates of the elasticity of employment with respect to the real wage and GDP. We also find a marked asymmetry in the response of employment to variations in real GDP and real wages in recession periods as against non-recession periods.
... Treasury modellers describe " the model as broadly new Keynesian in its dynamic structure but with an equilibrating long run " (Downes and Bernie, 1999, P.i). Economic activity in TRYM is demand determined in the short run but supply determined in the long run. ...
... There are three financial market identities, and two policy reaction functions. Treasury modellers describe " the model as broadly new Keynesian in its dynamic structure but with an equilibrating long run " (Downes and Bernie, 1999, P.i). Economic activity in TRYM is demand determined in the short run but supply determined in the long run. ...
... The procedure may be able to eliminate initial under-and over-shooting of responses to exogenous shocks in a simulation and therefore to dampen following cycles. The simulation results using this approach in Downes and Bernie (1999) show that some variables, such as the unemployment rate, smoothly approach the equilibrium path; however, still some other variables, such as GDP, cycle substantially. Following this suggestion, a set of simulations based on accommodating macroeconomic policies was also conducted. ...
This paper evaluates different policy options to reduce unemployment by using a version of the TRYM model. For the purpose of this paper, the TRYM model has been modified in several respects, particularly by combining the private business and government trading enterprise sectors. For the long run, the neoclassical model closure means that the unemployment rate converges to an exogenously set NAIRU rate. For the short and medium run, periods well in excess of ten years, policy simulations show that macroeconomic policy changes, wage changes, labour productivity changes, and NAIRU changes affect employment and unemployment. Further, these policy effects are produced whether the model begins in a disequilibrium situation of unemployment above the NAIRU or at the long run equilibrium growth path with unemployment equal to the NAIRU.
... The main potential explanations for the decrease in search efficiency that have been considered are a change in the work test for unemployed persons/increase in real unemployment benefits, and a reduction in immigration inflows. Most studies for this period find evidence to support the former explanation (the exception is Downes and Bernie, 1999); but different studies arrive at conflicting conclusions on the role of the latter (for example, Hughes, 1975, argues fairly strongly for a role for immigration, whereas Withers and Pope, 1985 find no evidence of a relation between unemployment and immigration inflows). ...
... , lagged u, lagged v). No outward shift in BC in 1980s. Downes and Bernie (1999) 1967:3 to 1998:3 (Quarterly) Regression model: t ...
... Finally, it is worth noting that there is some evidence that the sensitivity of unemployment to changes in the rate of growth in output increased after the mid-1970s (Nguyen and Siriwardana, 1988, and Downes and Bernie, 1999). This is significant since where there is persistence in unemployment cycles (as in Australia in the 1980s and 1990s) the magnitude of cyclical fluctuations will have an important influence on the average rate of unemployment taken across the cycle. ...
This paper reviews evidence on the equilibrium rate of unemployment and on causes of unemployment in Australia from empirical modelling of labour market outcomes. Three main types of models are reviewed - Phillips curve models; Multi-equation models; and Beveridge curve models. The paper begins with a simple review of labour market theory in order to provide some motivation for the empirical approaches that are examined. In the main part of the paper the three modelling approaches are reviewed. For each model the estimation methodology is described, main results on causes of unemployment from that approach are summarised, and an evaluation of the model is made.
... Also, in their estimated equation for total hours worked, which implicitly assumes hours per employee and employee numbers are perfect substitutes, the omission of a variable for standard hours worked may explain the reported instability of the estimated equation. Downes and Bernie (1999) explicitly include a variable for (average) hours of work in their employment equation, but they impose a coefficient of −1 on hours in the long-run, an assumption we will argue in theory and empirically is inappropriate. In a separate equation to explain average hours worked, they estimate a partial adjustment of actual hours worked to standard hours with a coefficient of nearly 0.5. ...
... These simplifying assumptions are common in computable general equilibrium models (e.g. Dixon & Rimmer, 2002), and they are imposed explicitly in the labour market decision studies of Downes and Bernie (1999), Lewis and MacDonald (2002) and others, and implicitly by other studies. ...
... However, making the plausible approximate assumption of constancy over the sample period of both ρ relative to w, which accords with the common view that most overtime is 'time and a half', and of F relative to w + ρ, the ratio E/W will be highly correlated with −HS (and we have already seen that H tends to gravitate towards HS), and we use the latter as a proxy variable. As explicitly pointed out by Lewis and MacDonald (2002), and as is the case in Downes and Bernie (1999), equation 6 is the derived cost minimising employment hire decision rule rather than a labour demand equation per se. However, it also can be interpreted as a particular type of, or a qualified, labour-demand curve. ...
Changes in standard hours of work, as occurred in the 1970s and 1980s, alter the budget constraint facing employers and their employment decisions. Using quarterly data for the period 1969:1-2004:1, an employment equation for Australia that includes standard hours as well as the usual output, real wage and trend explanatory variables is estimated. Standard hours are found to be a significant explanatory variable, and omission of the variable results in biased estimates of the parameters on the other variables, especially on the real wage. When we allow for asymmetric adjustment, employment decisions are found to respond more quickly to changes in economic conditions in recessions than in other phases of the business cycle. Copyright 2005 The Economic Society Of Australia.
... Because they did not directly estimate the demand for labour they will not be discussed here. 2 More recent studies have been undertaken by Lewis (1983), Lewis and Kirby (1988), Pissarides (1991), Russell and Tease (1991), Dungey and Pitchford (1998), Debelle and Vickery (1998) and Bernie and Downes (1999). Lewis and Kirby (1988) found that the Accord had brought about a shift in the supply curve for labour bringing approximately a 10 per cent fall in real wages and a rise in employment of 8 per cent implying an employment elasticity with respect to real wages of )0.8. ...
... Debelle and Vickery (1998) suggest an employment elasticity with respect to real wages of )0.7 for the period 1969±1997 and somewhat lower, )0.4 for the period from 1979. Bernie and Downes (1999) suggest that the dierences are due to de®nitional and data problems. Their results from the Treasury real income model (TRYM) suggest an employment elasticity of approximately )0.6 with respect to real wages. ...
The elasticity of demand for labor at the aggregate level is an important parameter for macroeconomic analysis. In particular, policy issues concerning the impact of wage falls on employment and unemployment hinge on the size of this parameter. It is argued in the present paper that previous work on the elasticity of demand for labor in Australia has been unsatisfactory in a number of ways. A new set of estimates is provided that are derived using a better methodology than before. Copyright 2002 by The Economic Society of Australia.
... No estimate is given of the effect of a change in the real wage on the NRU. Bernie and Downes (1999) base their estimates of the constant-output wage elasticity of demand on the Australian Treasury TRYM model. TRYM does not have a long-run demand function 12 and, like Debelle and Vickery, this model effectively operates as a supply-side model. ...
... Australian and overseas estimates of the constant-output elasticity of demand for labour are in general inelastic being in the range -0.15 to -0.8. The recent Australian estimate by Bernie and Downes (1999) using private sector data and including vacancies produced an estimate of about -1. Estimates which do not hold output constant find on average higher aggregate elasticities. ...
... of rise in wages of 1% was a - 0.61% for employed persons and -0.75% for employed hours. Dungey and Pitchford (1998), using more recent data estimate an elasticity with respect to real wages of –0.4. Debelle and Vickery (1998), advocate employment elasticity with respect to real wages of –0.7 for the period 1969 to 1997 and lower at-0.4 from 1979. Bernie and Downes (1999) suggest that the differences in estimates are due to variations in definitions, methodology and data. Their results from the TRYM model suggest an employment elasticity of about -0.6 with respect to real wages. In summary, the results for Australia suggest a wage elasticity of employment of about -0.4 to -0.8, which is higher than most ...
... The standard textbook treatment shows that if average wages are held at a minimum above the equilibrium wage then labour supply exceeds labour demand, resulting in unemployment. There is considerable empirical research on the labour market in Australia and the effect of rises in average wages on employment (see, for instance, Lewis and Seltzer 1996; Bernie and Downes 1999; Lewis and MacDonald 2002). This research indicates that a 10 per cent increase in average wages reduces employment by about 8 per cent. ...
The Australian Fair Pay Commission (AFPC) was established by the Howard government under the controversial WorkChoices legislation. It was heralded by its supporters as a major improvement on the previous system of safety-net wage cases under the Industrial Relations Commission and universally condemned by the union movement and Labor. Others questioned whether a minimum wage was needed at all or even whether it was a major impediment to labour-market adjustment. The AFPC's first and subsequent decisions were, therefore, looked on with interest by the media, academics, politicians and vested interests. This paper provides a critique of the AFPC's first decisions and suggests how the process of arriving at a minimum wage could be improved.
... Empirical studies have consistently found statistical support for a negative relationship between aggregate demand and unemployment and a positive relationship between real wages and unemployment (Pitchford, 1983; McMahon and Robinson, 1984; Trivedi and Baker, 1985; Dao, 1993; Valentine, 1993 ). These findings are also consistent with results obtained from reduced-form equations of the unemployment rate in structural labour market models (Pissarides, 1991; Huay and Groenewold, 1992; Scarpetta, 1996; Powell and Murphy, 1997; Debelle and Vickery, 1998; Downes and Bernie, 1999). Moreover, these empirical findings are supported by more descriptive work that demonstrates that a common theme in papers on unemployment in Australia is that business cycle fluctuations and real wage growth are the two primary factors influencing Australian unemployment (Gregory, 2000; Le and Miller, 2000; Thomson, 2000; Borland, 1997; Goodridge et al., 1995).Figure 2Figure 1 showed that the asymmetry in the unemployment rate is particularly evident from the mid-1970s, while the sample period also Figure 3: Differenced logarithms of the unemployment rate (upper left), productivity (upper right), real wages (lower left), and real unemployment benefits. ...
This paper combines recent developments in methods for solving and estimating rational expectations dynamic models. These developments are applied to a model of labor-market search, where firms operate under uncertainty. We assess the ability of the structural model to mimic nonlinear features found in the data. The solution to the model is obtained using a method of weighted residuals. The model is then estimated using an auxiliary model technique. Our results indicate that the simple theoretical representation of the labor market we propose is able to match the overall behavior of US hours worked along various dimensions. Beyond they show the usefulness of this combined approach to study dynamic models under rational expectations.
... Obdobné problematice byla a je věnována významná pozornost, o čemž svědčí následující výsledky vybraných studií: Citlivost nezaměstnanosti na změny míry růstu výstupů ekonomiky se zvyšovala v polovině 70. let (Downes a Bernie (1999)). To je významné, protože existují cykly v nezaměstnanosti, které ovlivňují průměrnou míru nezaměstnanosti. ...
... But, if the dependent variable instead is specified to be the number of employees N, then H should be included as an explanatory variable, and under the perfect substitution assumption, with a restricted elasticity of minus unity. This approach is adopted in the labour demand equation in the TRYM model for example (Taplin and Parameswaran (1993), Stacey and Downes ( 1995) and Downes and Bernie (1999)). Once we allow for imperfect substitutability of N and H for the reasons argued in this paper, the elasticity parameter on the H explanatory variable is given by minus the share of variable labour costs in total labour costs (or the ratio of the marginal and average products per hour worked), which is less than unity. ...
In Australia, and in other countries, we observe at any one time a wide distribution of hours worked per week. We develop a cost-minimising model to explain employer choices over the number of employees and their hours of work. An important finding is that hours of work and the number of employees are not perfect substitutes. We show that this has important implications for the way economists model labour demand and measure productivity. We show that estimates using total hours worked as the measure of labour input implicitly assumes perfect substitution of persons and hours and results, inter alia, in an overestimation of the rate of labour and multifactor productivity growth in Australia and especially in the period prior to the so called ‘productivity slow-down’.
... The main documentation for the TRYM model is: " The Macroeconomics of the TRYM Model of the Australian Economy " (Commonwealth Treasury, 1996), which gives an overview of the model and outlines the general macroeconomic framework underlying the model; " Documentation of the Treasury Macroeconomic (TRYM) Model of the Australian Economy " (Commonwealth Treasury, 1996,1999), 2 which gives details of the equations in the model; and " The User's Guide—How to Use the Treasury Macroeconomic (TRYM) Model of the Australian Economy with TSP Software " (Commonwealth Treasury, 1996), which explains the use of the commercially available software for running the TRYM model. In addition there are some 20 " TRYM related papers " dealing with various aspects of the TRYM model. ...
This paper examines the treatment of the labour market in three macroeconometric models of the Australian economy: the Australian Treasury Macroeconomic (TRYM) model, the Access Economics Macro (AEM) model, and the Murphy model. In each of these models, employment and unemployment are basically determined at the aggregate level (though in the Murphy model, labour demand is determined at the industry level). The unemployment rate converges in the long run to an equilibrium level at which the average rate of real-wage inflation across the economy is equal to the rate of productivity growth in the economy. This rate, the non-accelerating inflation rate of unemployment or NAIRU, is given by an expectations-augmented Phillips curve. In each of the models, the NAIRU is treated as exogenous and its value is estimated as a parameter of the model. In the short run, expected wage inflation depends on deviations of the unemployment rate from the NAIRU and on a number of other variables including, in all the models, the change in the unemployment rate (a "speed-limit" effect). This makes it possible to define a "short-run" or "flexible" NAIRU as the unemployment at which expected real-wage inflation equals the rate of productivity growth, and this short-run NAIRU depends on lagged unemployment.
... First, it is odd that the recession which commenced in 1990 is assigned to a less volatile period than is the recession which commenced in 1982, especially since most indicators suggest that the more recent recession was far more prolonged than the previous recession. Second, as will be seen below, the same techniques that 1 While there have been numerous studies of aggregate employment in Australia, researchers have focused on the estimation of a neo-classical labour demand schedule and associated adjustment issues (see for example Russell & Tease, 1991;Taplin & Parameswaran, 1993;Stacey & Downes, 1995;Phipps & Sheen, 1995;Debelle & Vickery, 1998;Dungey & Pitchford, 1998;Downes & Bernie, 1999;Lewis & MacDonald, 2002;and Dixon et al, 2005) but have either not looked at volatility at all or, to the extent that they have, they have not looked at volatility using time series techniques. suggest a break in output volatility in 1984 indicate no break in employment volatility in that period, which raises the possibility that the date for the break in output volatility may not be correct. ...
In this paper, we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method. This analysis is compared with more traditional methods based on the examination of first differences in the logs of the raw data. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise and gives break points which are not robust to alternative decomposition methods. When we apply a frequency filtered procedure we find that the detrended series is dominated by cyclical rather than noise variation. We find evidence of a sustained reduction in the cyclical volatility of both the gross domestic product and employment series in 1993-1994, not in 1984. We also find that there is a clear association between output volatility and employment volatility. Copyright © 2008 The Economic Society of Australia.
... The TRYM model is a small-scale macroeconometric model of the Australian economy for 'macroeconomic forecasting, policy analysis and sensitivity analysis' . 1 It has 122 equations, and among them 26 equations are estimated using quarterly data from the early 1970s. The TRYM model is described as 'broadly new Keynesian in its dynamic structure but with an equilibrating long run' (Downes & Bernie, 1999, p. i). ...
A modified Treasury Macroeconomic model is used to assess the relative effects of policy options to reduce unemployment. Simulation results are reported for the Australian economy starting at either a high or a low rate of unemployment. Over the next 10 years or so, all policies are projected to generate cyclical gains and losses in macroeconomic outcomes, including unemployment, relative to the base-case scenario, before converging to an exogenous long-run equilibrium growth path. The structure, amplitudes and other details of the cyclical responses vary both with the policy option and with whether the starting economy unemployment rate is close to the non-accelerating-inflation rate of unemployment or at a much higher rate. Copyright 2005 The Economic Society Of Australia.
... Note that this equilibrium hides a number of real-world characteristics such as a natural rate of unemployment associated with frictional and structural unemployment, any effects of union power and efficiency wages, and the effects of income and other taxes. Rather than complicate the model, for example to use the models of Layard, Nickell and Jackman (1991) or of Downes and Bernie (1999), we assume for long-run comparative static purposes that the SG does not alter the natural rate of unemployment , taxes and so forth unless explicitly modelled. Then, we proceed by asking in what ways, directions and magnitudes will the SG shift the labour demand or supply curve, or both, and how then do wages and employment respond. ...
... Most macro modelling of the Australian labour market focuses on the adjustment of stocks in the labour market (Stacey and Downes, 1995;Powell and Murphy, 1997;Downes and Bernie, 1999). A comprehensive recent survey of how the labour market is treated in Australian macroeconomic models (TRYM, AEM and Murphy) is provided by Thomson (2000). ...
This paper develops a general equilibrium job matching model, which is used to assess the impact of active labour market policies, reductions in unemployment benefits and reductions in worker bargaining power on long-term unemployment and other key macro variables. The model is calibrated using Australian data. Simulation experiments are conducted through impulse response analysis. The simulations suggest that active labour market programs (ALMPs) targeted at the long-term unemployed have a small net impact and produce adverse spillover effects on short-term unemployment. Reducing the level of unemployment benefits relative to wages and worker bargaining power have more substantial effects on total and long-term unemployment and none of the spillover effects of ALMPs.
Durante los años noventa, algunos países en desarrollo emprendieron reformas en el mercado de trabajo y abrieron sus economías al resto del mundo, medidas que no se tradujeron, como se esperaba, en mejoras sustanciales para los niveles de empleo e ingresos en esas economías. Argentina, en cambio, adoptó en años recientes una política tendiente a proteger el mercado doméstico, lo cual permitió aumentar considerablemente el nivel de empleo. En este trabajo, se analiza el mercado de trabajo argentino a partir de una ecuación de demanda laboral y de modelos VEC (modelo de corrección de equilibrio vectorial), de acuerdo con la propuesta de Johansen (1988) y Johansen y Juselius (1990), para el período 1994:3- 2011:2. Clasificación JEL: J08, J23, E24, F16.
Supporting analysis for Balancing Budgets.
This paper investigates the existence of long-run relationship between unemployment and several key macroeconomic variables in Malaysia, Singapore, and the Philippines. The Johansen–Juselius cointegration method confirms the existence of a stationary long-run cointegration relationship between unemployment and its determinants in all three countries. Exports and foreign direct investment are important determinants of unemployment in Malaysia. In the Philippines, government spending and exports are inversely related to unemployment. In Singapore, only exports appeared as a significant factor in determining unemployment. The results show that the speed of adjustment following a shock is more rapid in Singapore compared to the other two ASEAN countries.
A time-varying Phillips Curve was estimated as a means to examine the changing nature of the relationship between wage inflation and the unemployment rate in Australia. The implied time-varying equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips Curve in changing the equilibrium unemployment rate. The deviations of actual unemployment rates from the estimated equilibrium unemployment rates also performed remarkably well as measures of inflationary pressure. Copyright © 2009 The Economic Society of Australia.
Shifts in the ‘national’ equilibrium rate of unemployment relevant for determining national economic policy settings, we contend, are those shifts which are ‘common across states & territories’. One way to identify these is to identify the common shifts in state and territory Beveridge curves in Australia over time. When we do this we recover a national equilibrium unemployment rate series which is similar to, but at the same time different enough from, other measures to make it interesting. In our view it is this, or some other “national” equilibrium rate series, a series which ‘by construction’ will capture national (nation-wide) factors based on common shocks or common trends across states and territories, that should be the basis for policy and not an ‘aggregate series’ which does not do this. We estimate the value of the equilibrium unemployment rate for 2006 to be 3.7%, which may be compared with the actual unemployment rate for that year of 4.8%, indicating that even as recently as 2006 the actual rate was at least 1 percentage point above the equilibrium rate
Models of the aggregate unemployment rate have traditionally been estimated from structural models of the labour market or in a linear single-equation framework. However, theory as well as evidence suggest that the unemployment rate is asymmetric and should be modelled in a non-linear framework. In this paper the unemployment rate in Australia is modelled as a non-linear function of aggregate demand and real wages. Negative changes in aggregate demand cause the unemployment rate to rise rapidly, while real wage rigidity contributes its to slow adjustment back towards a lower level of unemployment. The model is developed by exploiting recent developments in automated model-selection procedures.
In a recent contribution to this journal, Lewis and MacDonald (2002) argue that Australian literature on aggregate demand for labour is permeated with misunderstandings and, as a result, existing empirical work has been misinterpreted. The objective of the present note is to argue that the interpretation of existing empirical studies, to the extent that they are based on a CES production technology, is broadly correct. We demonstrate that Lewis and McDonald have no basis for estimating anything more than the partial elasticity of labour demand, holding output constant, because their single-equation estimation does not identify the elasticity of demand for output. Copyright © 2004 Economic Society of Australia..
Over the past thirty years, macroeconomists thinking about aggregate labor market dynamics have organized their thought around two relations, the Phillips curve and the Beveridge curve. The Beveridge curve, the relation between unemployment and vacancies, has very much played second fiddle. We think that emphasis is wrong. The Beveridge relation comes conceptually first and contains essential information about the functioning of the labor market and the shocks that affect it. Labor markets in the United States are characterized by huge gross flows. Close to seven million workers move either into or out of employment every month. While that movement could be consistent with workers reallocating themselves across a given set of jobs, recent evidence by Steve Davis and John Haltiwanger suggests that these flows are associated with high rates of job creating and job destruction. Using a measure of job turnover, defined as the sum of employment increases in new or expanding establishments and employment decreases in shrinking or dying establishments, Davis and Haltiwanger find that during 1979-83, a period of shrinking employment, job turnover in manufacturing averaged some 10 percent per quarter. From a macroeconomic viewpoint, the labor market is highly effective in matching workers and jobs, yet those flows are so large that they imply the coexistence of unfilled jobs and unemployed workers. Examination of the joint movement of unemployment and vacancies can tell us a great deal about the effectiveness of the matching process, as well as about the nature of shocks affecting the labor market. In this paper, we first develop a conceptual frame in which to think about gross flows, about the matching process, and about the effects of shocks on unemployment and vacancies. We then turn to the empirical evidence, using data for the postwar United States. We focus first on the matching process, estimating the "matching function," the aggregate relation between unemployment, vacancies, and new hires. We then interpret the Beveridge relation. More precisely, we look at the joint behavior of unemployment, employment, and vacancies, and infer from it the sources and the dynamic effects of the shocks that have affected the labor market over the past 35 years.
. A Monetary Conditions Index has several attractive features.. Its motivation is simple: exchange rates influence. aggregate demand, especially insmall open economies. Thus, focusing on exchange rates as well-as interest rates may be important in un- derstanding an economy's behavior, and so in policymaking. Also, an MCI is easy to calculate. For central banks, an. MCI is an intuitively appealing operational target for monetary policy. It generalizes interest-rate targeting to include effects of exchange rates on an. open economy, and it serves as a model-based policy guide between formal model forecasts. For institutions other than central banks, an MCI as an index per se may capture both domestic and foreign influences on the general monetary conditions of a country. MCIs are gaining widespread use. The central banks of Canada, New Zealand,
This paper shows how one can interpret the joint movements of wages, unemployment and vacancies in the Phillips and Beveridge spaces to learn about the origins of the movements in unemployment. The view of the labor market underlying the conceptual framework emphasizes flows, matching, and Nash bargaining determination of wages. The approach is used to analyze the movements in unemployment in the US, in the UK and in Germany over the last twenty years.
This paper considers the scope for demand management policies to reduce the present high levels of European unemployment. While the evidence suggests that contractionary demand shocks are partly to blame, the presence of endogenous persistence mechanisms limit the scope for effective activist policies. Furthermore, in isolation they can do nothing to tackle the significant fraction due to adverse supply, or structural, developments. However, if appropriate supply-side policies are introduced, supportive demand management policies can speed the reduction in unemployment. The paper considers what such supportive demand management policies should look like and argues that in some cases a mild, although temporary, increase in inflation may be appropriate. The implications of uncertainty about the equilibrium rate of unemployment are also considered. The paper argues that such supportive policies are probably best sustained through monetary rather than fiscal policies and are likely to require changes in intra-European real exchange rates. Consequently a rapid move to full monetary union may be ill advised. Finally a potential role for temporary incomes policies is also identified.
Capital shortage
Charles Bean
Over the last 10 years the rate of investment has been depressed throughout the European Community, Some people believe that as a result there is insufficient capacity to absorb the unemployed in the event of a recovery in real demand. I estimate the size of this ‘capital gap’ and find that investment may need to rise by as much as 20% above the levels experienced during the first half of the 1980s, However, this represents no more than a return to the investment rates of the early 1970s, Furthermore firms will respond to capital shortages by installing new capital provided it is profitable. Thus the required resurgence in investment will arise automatically, so that capacity shortages are likely to be a temporary phenomenon at worst. The real obstacles to a rapid return to full employment lie elsewhere, paticularly in the labour market.
The presence of such transient capacity shortages during any sustained recovery does not, by itself, justify policy measures discriminating in favour of investment, for there is no obvious market failure involved. However, a sustained recovery will almost certainly be associated with a significant spurt in investment. It is quite appropriate for this to be financed by borrowing from abroad, so governments should be willing to see a deterioration in their current accounts and should not adopt deflationary macroeconomic policies to restrain demand.
ABSTRACT The labour market is a key area which determines how the macroeconomy,responds to various shocks and policy changes. Yet it is also an area of great uncertainty and opinions differ on how to treat particular equations. It is quite clear from the work on segmented labour markets that behaviour at the aggregate level can sometimes have very complex roots. TRYM works at a high level of aggregation and is designed to explore the links between the labour market and other macro markets in a concise and coherent way. To do so requires some simplifying assumptions. (Hence TRYM cannot be used to explore questions of detail in the labour market area. For example, there are no relative wage effects in TRYM and no distinction between demographic or occupational groups.) However, TRYM does have significant advantages over simple partial analyses of the labour market to answer broad macro questions. For example, a simple partial analysis of the labour market might conclude that wage changes will only have a relatively minor effect on employment in the short to medium term, and that very large changes in the real wage would be required to eliminate unemployment,at any particular time. Full model analysis on the other hand indicates that the employment,response is relatively large and that only relatively small changes in real wages are required to reduce unemployment. This follows from the financial market reaction to reduced inflationary pressures coming from the labour market. As the economy has become more open over time, the interest rate and exchange rate effects on activity have become more important in transmitting any given wage shock to unemployment.The model also has the advantage of being able to explore the link between labour market imbalances and imbalances in other areas of the economy. This paper re-examines the specification of the behavioural equations in TRYM particularly the wage
This paper examines whether a stable expectations-augmented Phillips curve exists for Australia. High real wages in the face of continuing high unemployment over the past decade have led to suggestions that the level of unemployment has little effect on wage determination, with the bargaining process taking place between employers and those employees in ‘secure employment’. Results from aggregate data suggest that the level of unemployment is relevant to wage determination. In addition, the impact of overtime on the growth in money wages is consistent with the view that those in secure employment are influenced by labour market conditions.
This paper reviews some concepts of equilibrium unemployment and outlines the fundamental difficulties facing any attempt to produce estimates of the equilibrium rate of unemployment. It develops simple quasi-reduced form models of aggregate unemployment based on rival non market-clearing and market-clearing theories. These equations form the basis of an empirical model of aggregate unemployment in Australia since 1969. The empirical evidence suggests that most of the observed increase in unemployment can be attributed to cyclical rather than structural-frictional factors. However, stylized explanations of cyclical unemployment exclusively along the lines of Keynesian, Classical or equilibrium search theory are found inadequate.
This book is concerned with why unemployment is so high and why it fluctuates so wildly. It shows how unemployment affects inflation, and discusses whether full employment can ever be combined with price stability. It asks why some groups have higher unemployment rates than others. The book thus surveys in a clear, textbook fashion the main aspects of the unemployment problem. It integrates macroeconomics with a detailed micro-analysis of the labour market. it uses the authors' model to explain the puzzling post-war history of OECD unemployment and shows how unemployment and inflation are affected by systems of wage bargaining and unemployment insurance. For each issue it develops new relevant theory, followed by extensive empirical analysis. The authors are established experts in this field, and this book gives their definitive treatment. It is based largely on new research, but also incorporates the best of existing knowledge. The long `overview' chapter is accessible to any non-specialist with an elementary knowledge of economics. The rest of the book provides key elements for courses in macroeconomics and labour economics at advanced undergraduate and graduate levels, and will serve as a major source of reference for both scholars and students. The basic aim of the book, however, is to provide the basis for better policy. As the book shows, by learning from theory and experience, we can avoid the waste and misery of high unemployment.
In this paper we discuss the development of Phillips curves in Australia over the forty years since Phillips first estimated one using Australian data. We examine the central issues faced by researchers estimating Australian Phillips curves. These include the distinction between the short- and long-run trade-offs between inflation and unemployment, and the changing level of the non-accelerating inflation rate of unemployment (NAIRU), particularly in the 1970s. We estimate Phillips curves for prices and unit labour costs in Australia over the past three decades. These Phillips curves allow the NAIRU to change through time, and include a role for import prices and `speed-limit’ effects. The paper concludes by discussing the changing role of the Phillips curve in the intellectual framework used to analyse inflation within the Reserve Bank of Australia over the past three decades.
This paper presents work on wage/price blocks for the smaller OECD countries which has been implemented in OECD's world econometric model, INTERLINK. The paper discusses theoretical, statistical and practical aspects of the estimation of business sector wage equations and five domestic demand deflators. It also presents a variety of diagnostic simulations in order to evaluate overall model properties ...
Ce papier présente le bloc prix-salaires des petits pays du modèle mondial de l'OCDE, INTERLINK. Le papier examine les aspects théoriques, statistiques et pratiques des équations, estimées pour le taux de salaire du secteur des entreprises et cinq déflateurs de la demande intérieure. Il présente aussi un ensemble de simulations destinées à évaluer les propriétés variantielles globales du modèle ...
In this paper we investigate the relationship between inflation and unemployment in Australia, post 1959. Our approach is based on identification of the time series components of the data. Evidence is found of significant correlations between the non-trend frequencies of inflation and unemployment and these correlations are exploited to estimate a simple forecasting model that does not suffer from the instability normally associated with the Phillips Curve. Estimates of the NAIRU are also provided and these range from as low as 2.3 per cent to as high as 9.2 per cent over this period, but these estimates are quite imprecise. Reasons for this imprecision are discussed.
We develop a ten variable structural VAR model of the Australian economy for the period 1980 to 1995. The VAR methodology has not been widely applied in the Australian context, despite its popularity in quantitative macroeconomics internationally.
The Phillips curve has generally been estimated in a linear framework. This paper investigates the possibility that the Phillips curve is indeed a curve, and shows that a convex short-run Phillips curve may be a more accurate representation of reality than the traditionally used linear specification. The paper also discusses the policy implications of convexity in the Phillips curve. These include the need for policy to be forward looking and to act preemptively. Convexity provides a strong rationale for stabilization policy, and it reinforces the need for policymakers to proceed cautiously. It also implies that deep recessions may have only a marginally greater disinflationary impact than shallower ones, unless they induce large credibility bonuses. Copyright 1998 by The Economic Society of Australia.
One of the most important features of the Australian economy in the past two decades has been the structural deterioration of labour market performance, reflected in both an increase in the average rate of unemployment and an outward shift in the Beveridge Curve, which depicts the relationship between unemployment and vacancies. This article attempts to uncover some of the causes for this structural deterioration, in terms of the factors affecting the UVrelationship.
We find that the Beveridge Curve shifted out around 1974, consistent with an increase in the equilibrium rate of unemployment which is generally agreed to have occurred around that time. Using gross labour market flow data, we also investigate the determinants of the equilibrium Beveridge Curve in the 1980s. We find that the Beveridge Curve shifted further outwards in the 1980s. The most important determinant of this shift was the decline in the search effectiveness of the unemployed, reflected in the increasing incidence of long-term unemployment. Partially offsetting this influence during this time were the declining labour force participation of men, and the very large increases in female employment.
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
The length of the transmission lags from monetary pblicy to output has been the subject of much research over the years, but there are serious problems in isolating the lags with any precision. This paper uses a simple model of Australian output to estimate the length of the lags, and then examines how attempts to grapple with the estimation problems might change the results.
We estimate that output growth falls by about one‐third of one per cent in both the first and second years after a one percentage point rise in the short‐term real interest rate, and by about one‐sixth of one per cent in the third year. This implies an average lag of about five or six quarters in monetary policy's impact on output growth. Each of these estimates is, however, subject to considerable uncertainty. We discuss the implications for policy of these relatively long and uncertain lags. Finally, we find no evidence that the average lag from monetary policy to output growth has become any shorter in the 1990s.
Macroeconometric models provide a formal and quantified framework that is an irreplaceable adjunct to the processes of policy thought. This article analyzes some recent developments in model structure and model use, and the interactions between them. Two major areas in which recent research has contributed to the ongoing process of model development are considered, namely the supply-side approach to wages and unemployment, and the modeling of the exchange rate. An improved vehicle for macroeconomic policy analysis is an objective of such developments and some issues surrounding the use of macroeconometric models in policy analysis are discussed. Copyright 1993 by The Economic Society of Australia.
This paper compares the Medoff-Fay estimates of labor hoarding during troughs, which are based on data from manufacturing plants, with aggregate estimates of excess labor on hand.The two sets of estimates seem consistent, which provides a strong argument in favor of the excess labor hypothesis. This is one of the few examples in macroeconomics where a hypothesis has been so strongly confirmed using detailed micro data.
RBNZ Monetary Policy Analysis Model: Version 1 -The "Top-Down" Model
- C Beaumont
- R Dennis
- T Ng
Beaumont C., Dennis R., and Ng T., (1995) "RBNZ Monetary Policy Analysis Model: Version 1 -The "Top-Down" Model", Working Paper W95/1, Research Section, Economics Department, Reserve
Bank of New Zealand.
Structural Modelling of Unemployment
- R J Brooker
Brooker, R. J. (1993), "Structural Modelling of Unemployment", Paper Prepared for the Access
Economics -Centre for Economic Policy Research National Forecasting and Economic Policy
Conference, 27-28 October 1993.
Fiscal Increasing Returns, Hysteresis, Real Wages and Unemployment
- O J Blanchard
- L Summers
Blanchard, O.J. and L. Summers (1986), "Fiscal Increasing Returns, Hysteresis, Real Wages and
Unemployment", National Bureau of Economic Research, Working Paper No. 2034.
Proceedings of a Conference The Australian Macro-Economy in the 1980's, Reserve Bank of Australia
- B Chapman
Chapman, B. (1990), "The Labour Market", Proceedings of a Conference The Australian Macro-Economy in the 1980's, Reserve Bank of Australia, Chapter 1, pp 7-65.
Restoring Full Employment
Committee on Employment Opportunities, (1993) "Restoring Full Employment", Discussion Paper,
December 1993.
Documentation of the Treasury Macroeconomic (TRYM) Model of the Australian Economy
- Commonwealth Treasury
Commonwealth Treasury (1996a), "Documentation of the Treasury Macroeconomic (TRYM) Model
of the Australian Economy", CPN Printing, Canberra.
The Macroeconomics of the TRYM Model of the Australian Economy
- Commonwealth Treasury
Commonwealth Treasury (1996b), "The Macroeconomics of the TRYM Model of the Australian
Economy", CPN Printing, Canberra.
Evaluating Simple Monetary-Policy rules for Australia
- G De Brouwer
- J Regan
de Brouwer, G. and Regan, J. (1997) "Evaluating Simple Monetary-Policy rules for Australia", Paper
presented to the 1997 RBA Annual Conference, Monetary Policy and Inflation Targeting, Kirribilli,
21-22 July.
An Introduction to the TRYM Model -Applications and Limitations" paper presented to
- P M Downes
Downes, P.M. (1995), "An Introduction to the TRYM Model -Applications and Limitations" paper
presented to, IFAC Symposium on Modelling and Control of National Economies, 2-5 July, The
Institution of Engineers Australia.
Monetary Policy in the TRYM Model, Uncertainty, Expectations and Policy Credibility
- P Downes
Downes P., and Louis C., (1996), "Monetary Policy in the TRYM Model, Uncertainty, Expectations
and Policy Credibility", paper presented to the Economic Modelling Bureau of Australia Model
Comparison Conference 'Monetary Policy: Price Level and Inflation Targeting', Canberra, 23 May.
Prospects for Output and Employment Growth with Steady Inflation
- M Dungey
- J Pitchford
Dungey, M. and Pitchford J. (1998) "Prospects for Output and Employment Growth with Steady
Inflation", in Debelle and Borland (1998) Unemployment and the Australian Labour Market, RBA
and ANU CEPR Conference Volume, June.
The Demand for Labour in the Long Run
- D Hamermesh
- O Ashenfelter
- R Layard
Hamermesh, D. (1986), "The Demand for Labour in the Long Run", Handbook of Labour Economics,
Ashenfelter, O. and Layard, R., Chapter 9.
Labor Demand ~ Princeton University Press
- D Hamermesh
Hamermesh, D. (1993), Labor Demand ~ Princeton University Press, Princeton N.J.
Sources of Shocks to Australian Unemployment: Two Tools and the Australian Case
- M Heeney
Heeney, M., (1994) "Sources of Shocks to Australian Unemployment: Two Tools and the Australian
Case", Treasury Mimeo.
Immigration and the Australian Adult Beveridge Curves
- B Hughes
Hughes, B. (1987), "Immigration and the Australian Adult Beveridge Curves", Department of
Economics Discussion Paper No. 140, University of Newcastle.
The Impact of a Lower NAIRU on the Australian Economy: Response in the Treasury Macroeconomic (TRYM) Model
- A Johnson
- P Downes
Johnson, A. and P. Downes (1994), The Impact of a Lower NAIRU on the Australian Economy:
Response in the Treasury Macroeconomic (TRYM) Model, Paper presented at the 1994 Conference of
Economists.
Macro-economics: an introduction to Keynesian-Neoclassical controversies
- R Levacic
- A Rebmann
Levacic, R. and Rebmann, A. (1989), "Macro-economics: an introduction to Keynesian-Neoclassical
controversies", Macmillan, 2nd Edition, pp 65-67.
Control Applications of the TRYM Model
- C Louis
Louis C., (1995) "Control Applications of the TRYM Model", paper presented to, IFAC Symposium
on Modelling and Control of National Economies, 2-5 July, The Institution of Engineers Australia.
Unemployment in Australia -a Focus on Structural Unemployment
- G Matthews
Matthews, G. (1991), "Unemployment in Australia -a Focus on Structural Unemployment", Paper
presented at the 1991 Conference of Economists.
The Simulation Properties of TRYM Under Alternative Specifications of the Financial Sector
- M Malakellis
- G Transom
Malakellis M. and Transom G., (1995) "The Simulation Properties of TRYM Under Alternative
Specifications of the Financial Sector", General Paper No[], Monash University, Center of Policy
Studies.
Real Wages and Unemployment
- C Murphy
- R Brooker
Murphy, C. and R. Brooker (1983), "Real Wages and Unemployment", Paper presented to the Bureau
of Labour Market Research Conference on The Structure an Duration of Unemployment, August
1983.