Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?

• Published in: Brookings papers on economic activity Vol. 2000; no. 1; pp. 237 - 311
• Main Authors: Fitoussi, Jean-Paul, Jestaz, David, Phelps, Edmund S., Zoega, Gylfi, Blanchard, Olivier, Sims, Christopher A.
• Format: Journal Article
• Language: English
• Published: Brookings Institution 01-01-2000; Johns Hopkins University Press; Brookings Institution Press
• Subjects: Capital costs; Comparative studies; Economic conditions; Economics and Finance; Employment; Humanities and Social Sciences; Inflation rates; International aspects; Labor conditions; Labor markets; Macroeconomics; Monetary policy; Productivity; Productivity growth; Social sciences; Unemployment; Unemployment rates; Wages
• ISSN: 0007-2303; 1533-4465; 1533-4465
• DOI: 10.1353/eca.2000.0006

It is widely agreed that the natural unemployment rate recovered strongly in several OECD economies in the 1990s while not yet in the others. This paper draws on models by the authors endogenizing the path of the natural rate in order to trace the causes and apportion the credit. The results suggest that the five structural reforms of the labor market urged by the OECD Secretariat were effective and account for some of the recovery where adopted. However, the paper sees most of the recoveries as largely the emergence from structural slump to a structural boom--a boom brought by revived investment in employees, customers and fixed capital. Behind this revival is a recovery of business-asset valuations resulting from improved expectations for productivity growth and, judging by the stock market, hopes for a future lift in business earnings that exceeds extrapolations of the past--both driven by the "new economy."