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Unemployment in the European Union: A Dynamic Reappraisal

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Author Info

  • Karanassou, Marika

    ()
    (Queen Mary, University of London)

  • Sala, Hector

    ()
    (Universitat Autònoma de Barcelona)

  • Snower, Dennis J.

    ()
    (Kiel Institute for the World Economy)

Abstract

This paper examines the movements in EU unemployment from two perspectives: (a) the NRU/NAIRU perspective, in which unemployment movements are attributed largely to changes in the long-run equilibrium unemployment rate and (b) the chain-reaction perspective, in which unemployment movements are viewed as the outcome of the interplay between labor market shocks and prolonged lagged adjustment processes. We present an empirical analysis that distinguishes between unemployment movements arising from longrun equilibrium changes and those arising from lagged intertemporal adjustments. This analysis has far-reaching policy implications. Our analysis shows that the rise in EU unemployment over the 1970s and first part of the 1980s was due largely to permanent shocks (especially the rise in working-age population and the decline in capital formation), whereas the unemployment increase in the first part of the 1990s was due largely to temporary shocks (especially the fall in competitiveness and the rise in real interest rates).

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 531.

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Length: 46 pages
Date of creation: Jul 2002
Date of revision:
Publication status: published in: Economic Modelling, 2003, 20 (2), 237-273
Handle: RePEc:iza:izadps:dp531

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Keywords: wage determination; labor force participation; employment; labor market shocks; NAIRU; natural rate; unemployment; intertemporal adjustments; homogeneous dynamic panels; panel unit root tests;

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  23. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I.
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