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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)

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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
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File Function: First version, 2007
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Publisher 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
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Handle: RePEc:ihs:ihsesp:207

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

Find related papers by JEL classification:
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. 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. [Downloadable!]
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  5. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January. [Downloadable!] (restricted)
    Other versions:
  6. 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.
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