European Parliament Library

Is Unemployment on Steroids in Advanced Economies?, Gabriel Di Bella, Francesco Grigoli, Francisco Ramirez

Despite conventional macroeconomic theory is based on the idea that demand shocks can only have temporary effects on unemployment, several European economies display highly persistent unemployment dynamics. The theory of hysteresis challenges this view and points out that, under certain conditions, demand disturbances can have permanent effects. In this paper, we find strong empirical evidence of unemployment hysteresis in advanced economies since the 1990s. Relying on an identification scheme instigated by an insider/outsider model, we study the effects of demand shocks allowing for cross-country heterogeneous dynamics, and exploit such heterogeneity to investigate what institutional settings have the potential to soften or amplify the effects of demand shocks. Our results indicate that strengthening labor market institutions that promote a faster adjustment of real wages, removing disincentives for firms to hire and for workers to be employed, and improving the matching between labor supply and labor demand can lessen the effects of adverse demand shocks and lead to a faster reversion of unemployment rates to pre-shock levels
Table Of Contents
Cover -- Contents -- 1 Introduction -- 2 Theoretical Setup -- 3 Stylized Facts -- 3.1 Unemployment Persistence -- 3.2 Unemployment and Wage Ination -- 4 Empirical Strategy and Shock Identification -- 5 Results -- 5.1 Heterogeneous PSVAR -- 5.2 The Role of Labor Market Institutions -- 5.3 Robustness -- 6 Conclusions -- References -- A Sample -- B Data Sources -- List of Figures -- 1 Unemployment Rate Levels and Changes -- 2 Autocorrelation of the Unemployment Rate -- 3 Coefficient on Lag Unemployment rate of an AR(1) Regression -- 4 Unemployment Rate and Wage Inflation -- 5 Phillips Curve -- 6 IRF Distribution from Heterogeneous PSVAR -- 7 Bootstrap of Heterogeneous PSVAR -- 8 FEVD -- 9 IRFs with Alternative Identification Strategies -- List of Tables -- 1 Unit Root Tests for Unemployment Rates Based on ADF Test -- 2 Unit Root Tests for Unemployment Rates Based on Johansen Trace Test -- 3 Panel Unit Root Tests for Unemployment Rates -- 4 Reduced-Form Phillips Curve Estimations -- 5 Cointegration Tests between Unemployment Rate and Wage Inflation -- 6 Panel Cointegration Tests between Unemployment Rate and Wage Inflation -- 7 Regressions of Unemployment Responses -- 8 Regressions of Unemployment Responses at Specific Horizons
Literary Form
non fiction
Physical Description
1 online resource (34 pages)
Specific Material Designation
Form Of Item

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