This paper provides a new explanation of why inflation is sluggish in response to aggregate demand shocks and why aggregate output changes as result of such shocks. We argue that these phenomena are related to between inputs and outputs in the process, production lags for short. The broad intuition is that activities in a modern economy are interconnected through complex input-output relations, with within individual firms, and that it takes considerable time for cost and price changes to penetrate the entire input-output system. Our analysis provides a rationale for a prolonged inverse relation between inflation and unemployment. The paper suggests that the interaction of inflation persistence and unemployment persistence may offer a possible explanation of high and prolonged European unemployment. (This abstract was borrowed from another version of this item.)

The authors present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders" ) are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("in siders"). The outsiders do not underbid the insiders since, were the y to do so, the insiders would withdraw cooperation from them, making their work unpleasant with harassment, and thereby reducing the prod uctivity and increasing the reservation wages of the underbidders. Th e resulting labor-turnover costs create economic rent which the insid ers tap in wage setting and, as a result, involuntary unemployment ma y arise.

The Caring Hand that Cripples: The East German Labor Market after Reunification by Dennis J. Snower and Christian Merkl. Published in volume 96, issue 2, pages 375-382 of American Economic Review, May 2006

This paper seeks to extend the domain of identity economics by exploring motivational foundations of in-group cooperation and out-group competition. On this basis, we explore the reflexive interaction between individual economic decisions and social identities in response to technological change in market economies. Our analysis explores how technological change falling on marketable goods and services, rather than non-market caring relationships, leads to a restructuring of identities, which increases the scope of individualism and promotes positional competition at the expense of caring activities. Since positional competition generates negative externalities while caring activities create positive ones, these developments have important welfare implications.