DP540 | Multiple Equilibria in the British Labour Market: Some Empirical Evidence

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01/04/1991

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Abstract

This paper constructs a simple, imperfectly competitive macro model which may have single or multiple equilibria depending on whether there are constant or increasing returns to scale in production. The model can be estimated and so can be used not only to test multiple versus single equilibrium models, but also to test whether multiple equilibrium models are capable of explaining the observed behaviour of unemployment. The model is estimated for the British economy for the period 1951-87. Some evidence for multiple equilibria is found and using such a model suggests that the rise in unemployment in Britain in the 1980s is best understood as a move from a low- to a high-equilibrium unemployment rate. Although the multiple equilibrium model does perform better than a single equilibrium model, however, the difference is not very significant so that there must remain considerable uncertainty about this issue.