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Global Factors, Unemployment Adjustment and the Natural Rate

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  • Smith, Ron P.
  • Zoega, Gylfi

Abstract

OECD unemployment rates show long swings which dominate shorter business cycle components and these long swings show a range of common patterns. Using a panel of 21 OECD countries 1960-2002, we estimate the common factor that drives unemployment by the first principal component. This factor has a natural interpretation as a measure of global expected returns, which is given added plausibility by the fact that it is almost identical to the common factor driving investment shares. We estimate a model of unemployment adjustment, which allows for the influence both of the global factor and of labour market institutions and we examine whether the global factor can act as a proxy for the natural rate in a Phillips Curve. In 15 out of the 21 countries one cannot reject that the same natural rate, as a function of the global factor, appears in both the unemployment and inflation equations. In explaining both unemployment and inflation, the global factor is highly significant, suggesting that models which ignore the global dimension are likely to be deficient.

Suggested Citation

  • Smith, Ron P. & Zoega, Gylfi, 2007. "Global Factors, Unemployment Adjustment and the Natural Rate," Economics Discussion Papers 2007-48, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:6806
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    Cited by:

    1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, February.
    2. Zoega Gylfi, 2010. "The Financial Crisis: Joblessness and Investmentlessness," Capitalism and Society, De Gruyter, vol. 5(2), pages 1-28, October.
    3. Gylfi Zoega, 2012. "Employment and asset prices," Applied Economics, Taylor & Francis Journals, vol. 44(26), pages 3343-3355, September.
    4. Tino Berger & Freddy Heylen, 2011. "Differences in Hours Worked in the OECD: Institutions or Fiscal Policies?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1333-1369, October.
    5. Hian Teck Hoon & Margarita Katsimi & Gylfi Zoega, 2023. "Investment and the long swings of unemployment," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(3), pages 611-632, July.
    6. Evan Totty, 2017. "The Effect Of Minimum Wages On Employment: A Factor Model Approach," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1712-1737, October.
    7. W. A. Razzak, 2016. "New Zealand Labor Market Dynamics: Pre- and Post-global Financial Crisis," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 12(1), pages 49-79, September.
    8. Chadwick, Meltem Gülenay & Fazilet, Fatih & Tekatli, Necati, 2015. "Understanding the common dynamics of the emerging market currencies," Economic Modelling, Elsevier, vol. 49(C), pages 120-136.
    9. Thirunaukarasu Subramaniam & Ahmad Zubaidi Baharumshah, 2011. "Unemployment And Speed Of Adjustment In Asean-3 Economies: A Cointegration Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(03), pages 327-347.

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    More about this item

    Keywords

    Unemployment dynamics; labour market institutions investment; principal components; global factors;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J1 - Labor and Demographic Economics - - Demographic Economics

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