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Unemployment and Imperfections in Labour and Credit Markets

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  • Dong, Mei
  • Huangfu, Stella

Abstract

The difference in unemployment rates between the U.S. and Europe is well documented. In this paper, we develop a model with frictional labour, goods and credit markets to understand how differences in unemployment rates across the U.S. and Europe can be explained by differences in income tax rate, unemployment benefits, monetary policy, and credit market imperfections. Using data between 2001 and 2007, our quantitative analysis shows that among these four factors, labour income taxes is the leading cause of the observed cross-country difference in unemployment rates, followed by unemployment benefits and credit market frictions. Monetary policy is not a contributing factor to the comparatively high unemployment in Europe.

Suggested Citation

  • Dong, Mei & Huangfu, Stella, 2021. "Unemployment and Imperfections in Labour and Credit Markets," Working Papers 2021-08, University of Sydney, School of Economics, revised Dec 2021.
    • Handle: RePEc:syd:wpaper:2021-08
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    Keywords

    credit; money; search; unemployment;
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