Working Paper: CEPR ID: DP2970
Authors: Wouter Den Haan; Christian Haefke; Garey Ramey
Abstract: This Paper explains the divergent behaviour of European and US unemployment rates using a job market-matching model of the labour market with an interaction between shocks and institutions. It shows that a reduction in TFP growth rates, an increase in real interest rates, and an increase in tax rates leads to a permanent increase in unemployment rates when the replacement rates or initial tax rates are high, while no increase in unemployment occurs when institutions are ?employment friendly.? The Paper also shows that an increase in turbulence, modelled as an increase probability of skill loss, is not a robust explanation for the European unemployment puzzle in the context of a matching model with both endogenous job creation and job destruction.
Keywords: job-matching model; TFP slowdown; turbulence; unemployment; unemployment benefits
JEL Codes: E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reduction in total factor productivity (TFP) growth rates (O49) | permanent increase in unemployment rates (J64) |
| increase in real interest rates (E43) | permanent increase in unemployment rates (J64) |
| increase in tax rates (H29) | permanent increase in unemployment rates (J64) |
| high replacement rates (H55) | exacerbation of negative impacts on unemployment (F66) |
| high initial tax rates (H29) | exacerbation of negative impacts on unemployment (F66) |
| employment-friendly institutions (J68) | no increase in unemployment (J68) |
| increase in turbulence (E32) | no consistent increase in unemployment rates (J64) |
| interaction between economic shocks and institutions (O17) | changes in unemployment rates (J64) |