How unemployment has been considered by mainstream macroeconomic models?
from Maria Alejandra Madi
From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989), in the general case, the capitalist economy is at full employment level of output. The underlying employment theory is based on the demand and supply of labour in a competitive market. In fact, this neoclassical approach supposes that price adjustment market mechanisms could guarantee full employment. In same specific cases, however, the general equilibrium implied by the IS-LM model could not necessarily correspond to a full employment level of output. This situation, called unemployment equilibrium, would be the result of market imperfections, such as rigid money wages, interest-inelastic investment demand, income-inelastic money demand, among others.
In the 1960s, mainstream macroeconomic models expanded the analysis of the negative correlation between inflation and unemployment. This correlation was based on the conclusions drawn from an empirical study -the Philips curve- about the negative relationship between the evolution of the rate of employment and the rate of variation of nominal wages in England at the turn of the 20th century. The attempt to incorporate the Phillips curve (trade-off between inflation and unemployment) in the analysis of the labour market dynamics turned out to put emphasis on the role of nominal wages in determining prices, and ultimately, on the demands of workers that put pressure on inflation. read more