Why Does Unemployment Persist?

The main movements of unemployment correspond to fluctuations in the short-run NAIRU (around a stable long-term NAIRU). These supply-side fluctuations have two main origins: (i) variations in the number of insiders involved in wage-setting; (ii) variations in the effectiveness of the unemployed outsiders as potential job-seekers. The evidence of micro studies suggests that (ii) is more important than (i), and this also helps to explain the widespread shift outwards in the u/v curve. To derive these arguments rigorously, the paper presents a simple model of efficiency wages, another of collective bargaining, and finally a fully dynamic model with labour market flows.