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Unemployment and the Economics of Gradualist Policy Reform

Gavin, Michael

This paper investigates the efficiency of adjustment to economic reform programs when the cost of adjustment arises from the unemployment that can be generated as contracting sectors shrink faster than expanding sectors can grow. Under plausible assumptions on the adjustment process, the speed of adjustment to "shock therapy" reforms is shown to be excessively rapid, and the rate of unemployment to be excessively high during the transition to new equilibrium. The authorities can improve the efficiency of the adjustment by removing the distortion gradually, rather than abruptly. Gradualism has beneficial income distributional, as well as efficiency properties, because it improves welfare of the unemployed, who are necessarily the least advantaged social group in this model.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 655
Published Here
February 24, 2011

Notes

June 1993.

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