New Hazards to Enterprise and Inclusion: Investment Stimuli and Workweek Reduction

  • Edmund S. Phelps


The project ITALY IN EUROPE addresses the question, made urgent by the challenges and opportunities from entry into the European Monetary Union, of how Italian government policy can best defend and promote enterprise and inclusion in the nation’s formal economy.1 If firms operating in Italy, national or foreign, fall far short of being as enterprising as many competing firms elsewhere in EMU, rewards to working and investing in Italy will suffer a relative deterioration—and inclusion will be further set back. If Italy’s formal economy remains unable to enlist the great majority of its working-age people, schemes for alternative work and alternative economic support generally will gain adoption, further weakening the economy—and the recent revival of private enterprise will be jeopardized.


Central Bank Marginal Product Real Interest Rate Natural Rate Formal Economy 
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  1. 2.
    See for example “Euro Prophet Raymond Barre Sees Europe Approaching a Golden Age,” by Anne Swardson, International Herald Tribune, April 30,1998, p. 1, and Hugo Dixon, “EMU’s Capital Consequences,” Financial Times, 30 April 1998, p. 17.Google Scholar
  2. 3.
    Franco Modigliani and Giorgio La Malfa, “Piu Lavoro? Una Strada C’E’,” Corriere della Sera, January 3,1998, and “Perils of Unemployment,” Financial Times, January 16,1998; Jean Paul Fitoussi, “Contro I Mercati Vince La Politica,” La Repubblica, 30 April 1988, p. 1.Google Scholar
  3. 4.
    Gilles Saint-Paul, “Would Shifting the Burden of Taxation from Labour to Capital Reduce Unemployment?” presented at the conference Rethinking the Welfare Society, CEPR.Vigo, 20/21 June 1997.Google Scholar
  4. 7.
    The repetitive error in expectations is analyzed in Phelps, “Money Wage Dynamics and Labor Market Equilibrium,” Journal of Political Economy, 76, Part 2, August 1968, and the bound-edness argument is in “Anticipated Inflation and Economic Welfare,” Journal of Political Economy, 73, February 1965.Google Scholar
  5. 9.
    The model, an open-economy version of a Tobinesque aggregative model, is set out in Phelps, “The Effectiveness of Macropolicies in a Small Open-Economy Dynamic Aggregative Model,” W.C. Brainard, W.D. Nordhaus and H.W. Watts, eds., Money, Macroeconomics and Economic Policy (Cambridge, Mass., MIT Press, 1991). A fuller exposition is Numero 63, Temi di discussione, Banca dapos;ltalia, Maggio 1986.Google Scholar
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    O J. Blanchard, “Debts, Deficits and Finite Horizons,” Journal of Political Economy, 93, April 1985,223–247.CrossRefGoogle Scholar
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    The high domestic cost of capital, arising from both Italy’s uncompetitive banking system and the income tax rate facing enterprises doing business in Italy, are reported by John Tagliabue in “Arriverderci Lira: Italians are Nervous,” International Herald Tribune, May 16–17, 1998, p. 11.Google Scholar
  8. 13.
    See the extensions and the applications to various settings in Phelps, Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest and Assets. Cambridge: Harvard University Press, 1994, especially Chapters 9 and 13.Google Scholar
  9. 14.
    See H.T. Hoon and E.S. Phelps, “Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment,” American Economic Review, 82, September 1992,889–900.Google Scholar
  10. Hoon and Phelps, “Payroll Taxes and VAT in a Labor-Turnover Model of the Natural Rate.” International Tax and Public Finance, 3, 367–381, 1996CrossRefGoogle Scholar
  11. Hoon and Phelps, “Growth, Wealth and the Natural Rate: is the European Job Crisis a Growth Crisis?” European Economic Review, May 1997.Google Scholar
  12. This model derives from Phelps, “Money-Wage Dynamics and Labor-Market Equilibrium.” Journal of Political Economy, 76, Part 2, August 1968, 678–711Google Scholar
  13. S.C. Salop, “A Model of the Natural Rate of Unemployment,” American Economic Review, 69, March 1979, pp. 117–125.Google Scholar
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    R. Layard, S. Nickell and R. Jackman, Unemployment, Oxford: Oxford University Press, 1991.Google Scholar
  15. See also Nickell’s contribution to the symposium on OECD unemployment rates in Economic Journal, May 1998.Google Scholar
  16. 16.
    E. S. Phelps, Structural Slumps, Cambridge, Mass.: Harvard University Press, 1994Google Scholar
  17. And the sharper estimates in Phelps and G. Zoega, Rivista di Politica Economica, 83, December 1993.Google Scholar
  18. See also their appraisal of several factors for the unemployment symposium in Economic Journal, May 1998.Google Scholar
  19. 17.
    R. Rowthorn, “Unemployment, Wage Bargaining and Capital-Labour Substitution,” Cambridge Journal of Economics, 23, July 1999, 413–25.CrossRefGoogle Scholar
  20. 21.
    Hian Teck Hoon and Edmund Phelps, “Effeti economici del ‘work sharing’ in un modello dinamico di ‘turnover,’“Rivista di Politico Economica, 84, November 1994, 105–126. This model is in the same vein as the turnover-training model used above to study the effects of a capital subsidy.Google Scholar

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© Springer Science+Business Media New York 2002

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  • Edmund S. Phelps

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