A Keynesian Approach
New Directions in Modern Economics series
Chapter 3: The NAIRU Theory, the NAIRU Story and Keynesian Approaches
3.1 INTRODUCTION Major European countries have experienced double-digit unemployment rates since the 1982/83 recession, associated with high individual as well as social costs. It is widely recognized that creating more employment is one of the foremost policy priorities as witnessed by recent declarations of the European union that recognizes the promotion of ‘economic and social progress and a high level of employment and to achieve balanced and sustainable development’ (Consolidated Version of the Treaty of Amsterdam, Article 2 p. 11) as its policy goal. Most of the policies designed to combat unemployment focus on the labour market, or what is often called ‘employability’. For example Siebert argues ‘that institutional changes aﬀecting Europe’s labor markets over the last 25 years are a central reason for Europe’s poor labor market performance’ (Siebert 1997, p. 39) and consequently: ‘Indeed, the specter of unemployment that is haunting Europe will not be exorcised unless governments are prepared to undertake major reforms of the institutional set up of the labor market’ (Siebert 1997, p. 53). This approach has been taken up by governments and supranational organizations in their recommendations on labour market policy. The OECD oﬀers a detailed list on how to increase labour market ﬂexibility (OECD 1997b), advising governments to reduce and shorten unemployment beneﬁts, reduce employment protection, and decentralize collective bargaining. More modestly, EU member countries have agreed to ‘review and, where appropriate, refocus their beneﬁt and tax system and provide incentives for unemployed or inactive people to seek and...
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