Domestic and Foreign Shocks to Employment and Capital Accumulation in Germany

Abstract

Current thinking on the causes of Europe’s persistent unemployment problem does not accord much weight to open-economy considerations. While there is agreement that the high unemployment of the 1980s reflects an increased level in the non-accelerating inflation rate of unemployment (NAIRU), it is equally clear that the increase recorded since 1980 cannot plausibly be attributed to the same kind of unfavourable supply shocks, including terms-of-trade shocks, which are widely seen as the major cause of rising unemployment in the 1970s (see Blanchard and Summers, 1986). Most recent explanations rely on one variant or another of hysteresis, that is, on the idea that a high equilibrium rate of unemployment may simply reflect a past history of high actual unemployment.

The authors are grateful to Søren Bo Nielsen, discussant and the participants of the Conference for their helpful comments.