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Paolo Surico, Mr. Luca A Ricci, and Pierpaolo Benigno
We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.
Paolo Surico, Mr. Luca A Ricci, and Pierpaolo Benigno

1 Introduction This paper proposes a theory in which the low-frequency movements in unemployment are explained by the low-frequency movements and the volatility of productivity growth. 1 On the one hand, an increase in long-run productivity growth lowers long-run unemployment. On the other hand, a fall in the variance of productivity growth leads to a fall in long-run unemployment even when long-run productivity growth remains flat. The key mechanism that explains these relationships rests on the assumption that real wages, or more broadly real marginal

Laurence M. Ball, Mr. Nicolas de Roux Uribe, and Mr. Marc Hofstetter

have been mined extensively, and economists still disagree about the determinants of long–run unemployment. Some argue that labor–market institutions are the key factor (e.g. Nickell, 1997 ), some emphasize the interaction of institutions with a variety of macroeconomic shocks, (e.g. Blanchard and Wolfers, 2000 ), and some argue that monetary policy influences long–run unemployment through hysteresis mechanisms (e.g. Ball, 2009 ). Latin America provides a fresh set of experiences that will help us test these ideas. A major reason that Latin American unemployment