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The Rise of Unemployment in Europe

A Keynesian Approach

Engelbert Stockhammer

This book offers a long overdue and refreshing Keynesian approach to the rise of European unemployment. It critically discusses the NAIRU theory and presents econometric evidence to assess the relative importance of capital investment and labor market institutions. The author also explores the reasons for the slowdown in capital accumulation, and is able to establish a clear link between changes in the financial sector, changes in corporate governance and investment expenditures.
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Chapter 3: The NAIRU Theory, the NAIRU Story and Keynesian Approaches

Engelbert Stockhammer


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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