Working Paper: CEPR ID: DP4243
Authors: Marika Karanassou; Hector Sala; Dennis Snower
Abstract: This Paper presents a reappraisal of unemployment movements in the European Union. Our analysis is based on the chain reaction theory of unemployment, which focuses on (a) the interaction among labour market adjustment processes, (b) the interplay between these adjustment processes and the dynamic structure of labour market shocks, and (c) the interaction between the adjustment processes and economic growth. We divide the shocks into institutional variables, price variables, and growth drivers. Estimating a system of labour market equations for a panel of EU countries, we derive the dynamic unemployment responses to each shock. Our analysis permits us to distinguish between the short- and long-run effects of the shocks. Different shocks generate different degrees of ?unemployment persistence? (responses to temporary shocks) and ?unemployment responsiveness? (responses to permanent shocks). We find that the growth drivers play a dominant role in accounting for the main swings in EU unemployment.
Keywords: chain reaction theory; dynamic contributions; employment; homogeneous dynamic panels; labor force participation; labor market shocks; natural rate; panel unit root tests; unemployment and wage determination
JEL Codes: E30; E37; J32; J60; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic growth (O49) | unemployment (J64) |
| temporary shocks (E32) | persistent unemployment effects (J65) |
| permanent shocks (E32) | immediate and substantial response in unemployment rates (J65) |
| institutional variables (D02) | increasing negative influence on unemployment (F66) |
| price variables (P22) | significant impacts on unemployment (F66) |
| shocks (E32) | unemployment mediated by adjustment processes (J65) |