Working Paper: CEPR ID: DP232
Authors: George Alogoskoufis; Alan Manning
Abstract: In this paper we present an investigation of unemployment persistence in Japan, the United States and fourteen European economies. We concentrate on the sources of slow adjustment in the labour market, such as sluggishness in labour demand and persistence in the employment and wage targets of wage-setters. Two structural characteristics seem to account for most of the recent differential unemployment persistence in our sample of countries: first, sluggishness in labour demand, and second, the relative weighting in the preferences of wage-setters of real wage deviations from target as against employment deviations from target. We also examine the short-run and medium-run effects on unemployment of shocks and policies that shift the labour demand and wage-setting curves respectively. Finally, we examine the implications of our findings for current policy debates.
Keywords: unemployment; adjustment; labour market flexibility; wage-setting process
JEL Codes: 824; 832
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sluggishness in labor demand (J23) | unemployment persistence (J64) |
| relative weighting of wage deviations vs employment deviations (J31) | unemployment persistence (J64) |
| dynamics of unemployment (J64) | unemployment persistence (J64) |
| structural differences in labor market flexibility (J29) | unemployment persistence (J64) |
| short-run elasticity of labor demand (J23) | dynamics of unemployment (J64) |
| weight given to wages in wage-setting (J31) | dynamics of unemployment (J64) |
| shocks originating from labor demand (J49) | unemployment (J64) |
| shocks affecting wages (J31) | unemployment (J64) |
| understanding sources of shocks (D80) | short-run changes and long-term unemployment persistence (J64) |
| demand and supply policies (E64) | unemployment persistence (J64) |