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The European Employment Experience

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Author Info
Ljungqvist, Lars
Sargent, Thomas J

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Abstract

Similar durations but lower flows into unemployment gave Europe lower unemployment rates than the United States until the 1970's. But since 1980, higher durations have kept unemployment rates in Europe persistently higher than in the U.S. A general equilibrium search model with human capital explains how these outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to a parameter that measures a worker's loss of human capital after an involuntary job loss. An increase in that parameter between the 70s and the 80s made workers face more turbulence in labor market outcomes and allows our model to match features of a number of empirical studies showing that workers experienced more earnings volatility after 1980. Our model also explains why, especially among older workers, hazard rates of gaining employment in Europe fall off sharply with the duration of unemployment, and why displaced workers in Europe experience smaller earnings losses and lower re-employment rates than those in the United States. The effects of layoff costs on unemployment rates depend on the proportions of frictional and structural unemployment and therefore on the generosity of unemployment benefits and the amount of microeconomic turbulence facing workers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3543.

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Date of creation: Sep 2002
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Handle: RePEc:cpr:ceprdp:3543

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Keywords: europe layoff costs unemployment unemployment compensation

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wasmer, Etienne, 2002. "Interpreting Europe and US Labor Markets Differences: The Specificity of Human Capital Investments," IZA Discussion Papers 549, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Alesina, Alberto F & Glaeser, Edward L & Sacerdote, Bruce, 2005. "Work and Leisure in the US and Europe: Why So Different?," CEPR Discussion Papers 5140, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Carsten Ochsen, 2005. "Labour Market Institutions and Unemployment Revisited," Thuenen-Series of Applied Economic Theory 49, University of Rostock, Institute of Economics, Germany. [Downloadable!]
  4. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2006. "The Political Economy of Flexicurity," Working Papers 2006-15, FEDEA. [Downloadable!]
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  6. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, . "Cross-skill Redistribution and the Tradeoff between Unemployment Benefits and Employment Protection," Working Papers 2004-26, FEDEA. [Downloadable!]
    Other versions:
  7. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  8. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non-Wage Labour Costs," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  10. Jorg, LINGENS & Klaus, WAELDE, 2005. "Pareto-Improving Unemployment Policies," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2005033, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  11. Boeri, Tito & Burda, Michael C., 2004. "Preferences for Rigid versus Individualized Wage Setting in Search Economies with Frictions," IZA Discussion Papers 1133, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  12. Georg Duernecker, 2008. "Technology Adoption, Turbulence and the Dynamics of Unemployment," Economics Working Papers ECO2008/10, European University Institute. [Downloadable!]
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  14. Wasmer, Etienne, 2003. "Interpreting European and US Labour Market Differences: The Specificity of Human Capital Investments," CEPR Discussion Papers 3780, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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