Determinants Of Unemployment In The European Union

Unemployment as an important economic issue draws the attention of numerous researchers, especially since the global financial crisis which caused high and permanent unemployment rates in the European Union (EU). The main goal of this paper is to identify significant macroeconomic determinants of unemployment in the EU. For this purpose, a dynamic panel analysis was conducted for all EU member countries in the period from 1995 to 2016. The comprehensiveness of the conducted analysis based on the economic theory, which includes all 28 EU member states for the longest period of observation so far, investigation of the homogeneity of determinants on the EU level, and the analysis of the youth unemployment determinants, is how this paper contributes to the existing literature. This analysis confirmed the significance of output gap, investment, real long-term interest rates, inflation, and unemployment in the previous period as the determinants of unemployment in the entire EU, with only real interest rates and previous unemployment robust in all of the models. Unemployment rates in the old and new member states proved relatively homogeneous. The growth rate of production has a significant negative impact only on youth unemployment. The relationship between unemployment gap and output gap has been additionally researched by a static panel analysis and it is concluded that Okun’s law in EU is valid, i.e. that there is a negative link between the unemployment gap and the output gap.