THE THICK VOLUME under review, by Richard Layard, Stephen Nickell, and Richard Jackman, is an extensive econometric and theoretical study, using time-series and cross section data, of the central tendency of the unemployment rate and its fluctuations in 19 OECD countries since the mid-50s. It thus joins the company of several recent macroeconometric studies of employment determination using international time-series data. Of these it is easily the most far-ranging study to date though in its microscopic examination of social legislation it has somehow neglected a range of macro factors right under its nose. Readers will find an abundance of arresting claims and provocative positions to keep the critical juices flowing. For me the volume is significant not (or hardly at all) as an assemblage of particular modelings and findings but primarily as an early econometric expression of the paradigm shift we are now witnessing in macroeconomics. Once nearly made extinct by a neoclassical winter, a school of economists are today furiously at work on unemployment considered as an equilibrium phenomenon' springing from en-

PRICES AND QUANTITIES iS the brilliant and disturbing last work of Arthur M. Okun (1928-1980). For more than a decade Okun was the foremost practitioner of macroeconomics in the United States. His critical intelligence at both the theoretical and empirical ends of economics was unsurpassed. These facts were virtually a manufacturer's warranty that the book, whatever its argumentation and evidence, would be significant; we want to know what Okun thought. But this background was no guarantee of an important treatise, and it must have taken some courage to venture a big theoretical work, in an accessible style, on urgent questions. In fact, Okun has delivered a creative and virtuosic study in economic theory. The book's contribution is to provide a complete description of an economy in which rational economic agents consider the distributional consequences of wage and price decisions. The perspective adopted, one which is winning growing favor of late, is contract-theoretic. Because they wish to economize on their costly transactions with one another, people trade repeatedly with the same agent; so trust and fidelity to understandings are important. The ensuing analysis lodges some basic dissents from the informational-expectational paradigm developed over the last score of years. It is particularly stimulating, and troubling, on the main policy controversy of the decade, the question of disinflation.

This paper is a brief for the introduction of a subsidy to any qualified firm for its use of low-wage employees as a means to reduce the unemployment and raise the pay of disadvantaged workers. There would be a case for such a wage subsidy in all the advanced market economies, and certainly the American one, regardless of recent trends. The case has grown stronger, however, with the worsening of the relative wages and especially the unemployment rates of low-age workers. The globalization of investment and the bias of technical progress are the causes most often suggested. I would add the growth of the system-the public entitlements to hospitalization, to retirement and disability insurance, and to the benefits labeled welfare in the narrow sense. Since this factor tends to be overlooked, I devote Section I to it. Section II proceeds to the case for a low-wage employment subsidy. It will be clear that the beneficial effects of the subsidy on disadvantaged workers are the mirror opposite of the harmful side effects of the system, side effects that the subsidy would counteract. I. Side Effects of the Welfare System

Nobel Prize Lecture, December 8, 2006

We are in the midst of a structural boom the force of which has not been seen in this country since the 1920’s. After the U.S. unemployment rate hit 6 percent in late 1994, following its two-year recovery, many experts assumed that unemployment had regained its naturalrate path. The natural unemployment rate in the second half of the 1980’s had been put at around 6.5 percent in several estimates, and if the trend reduction in the natural rate brought about by the continuing relative decline of high-school dropouts in the labor force and those whose education stopped at the diploma is placed at 0.07 per annum, it would have declined on that account to around 6 percent by 1995 (Phelps and Gylfi Zoega, 1997). Furthermore, we saw in 1995 the end of

This paper is one in a series directed toward the construction, with certain modern building blocks, of a non-monetary theory of employment fluctuation in market economies. The closed-economy model here parallels the open-economy model in Phelps (1988). The objective is a plausible theory that helps to account for some or all of the long swings in economic activity over recent decades. In fact, this non-monetary theory has grown out of one of the models used by Fitoussi and Phelps (1988) to account for the 1980s depression over much of the world, a slump that demand-driven models are hard-pressed to explain.