Aggregate Supply and Demand Factors in OECD Unemployment: an Update

40 Pages Posted: 15 Mar 2004 Last revised: 20 Feb 2022

Date Written: September 1985

Abstract

The paper analyzes the change in unemployment in 12 OECD countries over the period 1970-83 in terms of underlying aggregate supply and demand shifts. Earlier evidence on wage gaps (given by Brunoand Sachs) is revised and extended. For most European countries a process of reduction in gaps is taking place in the 1980's, but the average absolute levels, when weighted by country size, are still sizeable, thus a 'classical' element of unemployment remains. However, most of the large additional increase in unemployment after 1980 (as well as the profit squeeze and investment slowdown) is ascribed to the contractionary stance of macropolicy in Europe, in contrast to the subsequent expansion and sharp fall of unemployment in the U.S. The large U.S. deficit coupled with monetary restraint and the resulting dollar appreciation also account for the sharp difference in the behavior of import prices in the U.S. and Europe which in turn may explain the considerably slower inflation deceleration in Europe and the reluctance to expand activity more rapidly.

Suggested Citation

Bruno, Michael, Aggregate Supply and Demand Factors in OECD Unemployment: an Update (September 1985). NBER Working Paper No. w1696, Available at SSRN: https://ssrn.com/abstract=338774

Michael Bruno (Contact Author)

Hebrew University (Deceased)

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