Centre for Labour Economics

CEP's work on Unemployment Work by the CEP on unemployment and its predecessor the Centre for Labour Economics has defined the way modern society thinks about unemployment. The prevailing consensus following World War II was that unemployment was essentially a demand side phenomenon, then after the period of stagflation in the 1970s, the prevailing view under Thatcherism was that governments should step back and allow the market to find its NAIRU ('non-accelerating inflation rate of unemployment'. Against this background, work by Richard Layard, Stephen Nickell and Richard Jackman agreed that there was a NAIRU, but that supply side policies could be used to lower it (for example, improving matching between workers and vacancies). They published their framework for this view in their 1991 book 'Unemployment: Macroeconomic Performance and the Labour Market'. A second edition was published in 2005 providing an update on their views, after nearly 15 years of policy reform in many countries, much initiated by their research. These types of ideas underpinned the New Deal for Young People, first proposed by Richard Layard, and adopted by Gordon Brown in 1998 (this was later extended to other groups on welfare). An account of the CEP's influence in this area is given by John Van Reenen in the CEP's first article in the 'Big Ideas' series. CEP Associate Christopher Pissarides was awarded the Nobel Prize in Economic Sciences for his work with Peter Diamond and Dale Mortensen on the analysis of labour markets with search frictions. Previous to their work, traditional models of unemployment assumed that workers and jobs were instantaneously matched. The introduction of search frictions provided a formal way of thinking about the processes through which firms and workers search for the right job match. Pissarides' book 'Equilibrium Unemployment Theory' is a standard reference in the economics of unemployment. Some of the more recent CEP work on unemployment is summarised below, and a full list can be found by browsing the discussion papers. Unemployment in the Great Recession Christopher Pissarides (2013) studies the impact of the Great Recession on employment in Germany, the United States and Britain. It is shown that Britain suffered from recession but no structural problems; the United States suffered from structural unemployment during the recovery; Germany exhibited a much better performance both during and after the recession. Further reading: Unemployment in the Great Recession. Tackling Long-Term Unemployment What works for tackling long term unemployment? Today's long-term unemployed in the UK face tougher requirements in return for their benefits - community work, training programmes or daily visits to the Jobcentre. Barbara Petrongolo (2013) surveys the evidence on the effectiveness of the 'sticks' and 'carrots' of active labour market policies. Further reading: Tackling long-term unemployment: the research evidence The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment How is the structure of unemployment across groups and its cyclical movements across time shaped by changes in labour market flows. Using data from the UK over the last 35 years, Michael Elsby, Jennifer Smith, and Jonathan Wadsworth (2010) decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. The largest chunk: two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions and this share has been broadly the same in each of the past three recessions. Further reading: The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment. Modelling Unemployment Pascal Michaillat and Emmanuel Saez (2013) present a static model of aggregate demand and unemployment. This is motivated by the prevalent view that fluctuations in aggregate demand explain some of the fluctuations in unemployment observed over the business cycle. However, the standard theory of unemployment - the matching theory developed by Diamond (1982), Mortensen (1982), and Pissarides (1985) - only accounts for fluctuations caused by changes in wages, matching process, production technology, or policy. In this paper they propose a model that combines both these elements, building on matching theory and accounting for the influence of aggregate demand on unemployment. Further reading: A Model of Aggregate Demand and Unemployment. Camille Landais, Pascal Michaillat and Emmanuel Saez (2011) explore optimal unemployment insurance (UI) theoretically. They build a model that generates optimal UI over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession, and offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. Further reading: Optimal Unemployment Insurance Over the Business Cycle.