Internal and External Balance: The Layard, Nickell and Jackman Approach to the NAIRU and External Balance

The analysis of the processes determining unemployment in an open economy has been considerably advanced by the work of Layard, Nickell and Jackman in their book Unemployment: Macroeconomic Performance and the Labour Market. Reviews their contribution. They have developed an analysis based on the role of the “wedge” between the producer and consumer wages. This wedge depends, in part, on the real exchange rate. A change in the wedge may change the bargain between unions and employers. If it does, then a change in the real exchange rate may change the equilibrium level of unemployment. It is frequently claimed that this is, indeed, the case. Argues that the theoretical and empirical support for this proposition is rather weak.