Unemployment, Disequilibrium and the Short-Run Phillips Curve: An Econometric Approach


The paper specifies a disequilibrium model for the aggregate
labor market consisting of demand and supply functions for labor,
an adjustment equation for wages as well as for prices, a
transactions equation and, finally, an equation that relates
measured unemployment to vacancies and to excess demand. The
model has a more sophisticated treatment of dynamics than earlier
disequilibrium models, and uses measured unemployment as an
endogenous variable. Two of the error terms are assumed to be
serially correlated and the coefficients are estimated by maximum
likelihood. The parameter estimates and the goodness—of—fit are
satisfactory and the model's implications for the behavior of
several important variables are sensible. Excess demand
estimates computed in various ways are reasonable. The model is
used to estimate the natural rate of unemployment as well as a
short run Phillips curve. Finally, the stability properties of
the model are analyzed by considering the eigenvalues of the
system; they are found to have moduli less than one.

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Journal of Applied Econometrics, Vol. 2, 1987
Working Papers