Worker Insecurity and U.S. Macroeconomic Performance During the 1990s

Abstract

A model of macroeconomic outcomes is developed in which money and aggregate demand matter, inflation is the outcome of conflicting nominal income claims, and institutions create relatively enduring “conditional closures” in otherwise open macroeconomic processes. This model is used to hypothesize that U.S. macroeconomic performance during the late 1990s resulted from a combination of relaxed monetary policy and the consolidation of institutional changes in the U.S. labor market that, by the late 1990s, rendered workers' employment and income prospects insecure. Empirical results confirm that increased worker insecurity contributes to explaining U.S. inflation since 1973, and that by the 1990s, the inflation costs of any given rate of unemployment in the United States had been reduced. It is suggested that the supply side of the U.S. economy may now be capable of sustaining low unemployment and inflation outcomes, primarily as a result of labor market institutions that have “zapped” U.S. labor.