Is Australian unemployment Keynesian or neo-classical?: a disequilibrium approach to unemployment

The basic aim of this thesis is to investigate unemployment in Australia using a disequilibrium framework. In particular, involuntary unemployment is examined from both a Keynesian and a Classical perspective. As a consequence, both Classical and Keynesian doctrines were interpreted as disequilibrium theories called Neo-Classical and (New) Keynesian respectively. Examined within a (New) Keynesian (disequilibrium) theory an unambiguous definition of involuntary unemployment emerges. The Neo-Classical (disequilibrium) theory, unlike the Classical theory, also allows for bouts of involuntary unemployment. Consequently, a distinction between Neo-Classical and (New) Keynesian involuntary unemployment is considered a matter of degree rather than principle; if wages adjust more rapidly than employment toward equilibrium, then unemployment would be Neo-Classical. Furthermore, since involuntary unemployment is a disequilibrium concept, the unemployment model was estimated using a disequilibrium procedure. After reviewing the econometrics and theory of disequilibrium a generalized partial adjustment equation, developed by Chow (1983), was adopted. This procedure has distinct advantages over other techniques. The unemployment model was estimated for Australia over two periods: 1964 to 1972 for the first period and from 1972 to 1986 for the second period. It was found that neither period could be classified as either pure (New) Keynesian or Neo-Classical; however, there is evidence of elements of both theories in each period. This thesis also examined structural and search unemployment. Finally, evidence of labour dishoarding in period two was also found.