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Some Evidence on the Relevance of the Chain-reaction Theory in Selected Countries

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Author Info

  • Hofer, Helmut

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Schwarzbauer, Wolfgang

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Schuh, Ulrich

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Snower, Dennis J.

    (The Kiel Institute for the World Economy, Kiel, Germany)

Abstract

In this paper we challenge the traditional labour market view, which argues that unemployment is determined in the long-term by its equilibrium rate, which in turn is affected by permanent shocks of some exogenous variables. In our empirical approach we decompose the dynamics of employment and labour force into transitory and permanent components. We estimated a small labour market model using VAR techniques. By simulating the model we are able to quantify the relative importance of the permanent and transitory components for the movements of the unemployment rate in four countries (Austria, France, UK, and USA). We find that the transitory component has a significant impact on unemployment only in the US. In contrast to that the permanent component appear to influence unemployment significantly in all included countries. In combination with the observation that labour market dynamics differ between countries, this may have powerful policy implications.

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File URL: http://www.ihs.ac.at/publications/eco/es-207.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 207.

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Length: 31 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ihs:ihsesp:207

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Related research

Keywords: Unemployment; Natural rate hypothesis; Labour markets; Employment; Adjustment costs;

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  1. Karanassou, Marika & Sala, Hector & Snower, Dennis, 2003. "Unemployment in the European Union: a dynamic reappraisal," Economic Modelling, Elsevier, vol. 20(2), pages 237-273, March.
  2. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  3. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
  4. repec:fth:inseep:9645 is not listed on IDEAS
  5. Henry, Brian & Karanassou, Marika & Snower, Dennis J, 2000. "Adjustment Dynamics and the Natural Rate: An Account of UK Unemployment," Oxford Economic Papers, Oxford University Press, vol. 52(1), pages 178-203, January.
  6. Karanassou, Marika & Snower, Dennis J., 1997. "Is the natural rate a reference point?," European Economic Review, Elsevier, vol. 41(3-5), pages 559-569, April.
  7. Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
  8. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
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