Unemployment, Disequilibrium and the Short-Run Phillips Curve: An Econometric Approach

Abstract

The paper specifies a disequilibrium model for the aggregate labor market consisting of demand and supply functions for labor, an adjustment equation for wages as well as for prices, a transactions equation and, finally, an equation that relates measured unemployment to vacancies and to excess demand. The model has a more sophisticated treatment of dynamics than earlier disequilibrium models, and uses measured unemployment as an endogenous variable. Two of the error terms are assumed to be serially correlated and the coefficients are estimated by maximum likelihood. The parameter estimates and the goodness—of—fit are satisfactory and the model's implications for the behavior of several important variables are sensible. Excess demand estimates computed in various ways are reasonable. The model is used to estimate the natural rate of unemployment as well as a short run Phillips curve. Finally, the stability properties of the model are analyzed by considering the eigenvalues of the system; they are found to have moduli less than one.