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The Eu–Us Unemployment Puzzle Revisited: Institutions, Demography, And Capital Flows

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  • Marchiori, Luca
  • Pierrard, Olivier
  • Sneessens, Henri R.

Abstract

The historical evolution of the EU–US unemployment-rate gap is often explained in the literature in terms of asymmetric changes in labor-market institutions. There may well also be asymmetries in population aging, which may generate international capital flows and have substantial impacts on relative unemployment rates. In this paper, we ask whether the combination of institutions, aging, and capital flows explains the rise in the unemployment gap between 1960 and 2010. To this end, we set up a two-region OLG model with search unemployment in which we introduce the historical and projected changes in labor-market institutions and demographics. We show that asymmetric institutional changes alone can reproduce a large part of the historical rise in the unemployment gap. However, this result no longer holds once we add asymmetric aging in closed economies. We find this initial result again, and in an even stronger form, when we allow for international capital mobility.

Suggested Citation

  • Marchiori, Luca & Pierrard, Olivier & Sneessens, Henri R., 2017. "The Eu–Us Unemployment Puzzle Revisited: Institutions, Demography, And Capital Flows," Journal of Demographic Economics, Cambridge University Press, vol. 83(3), pages 259-305, September.
    • Handle: RePEc:cup:demeco:v:83:y:2017:i:3:p:259-305_1
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    Cited by:

    1. Willem DEVRIENDT & Freddy HEYLEN, 2020. "Macroeconomic and Distributional Effects of Demographic Change in an Open Economy - The Case of Belgium," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 86(1), pages 87-124, March.
    2. Luca Marchiori, 2020. "PENELOPE: Luxembourg Tool for Pension Evaluation and Long-Term Projection Exercises," BCL working papers 140, Central Bank of Luxembourg.
    3. Devriendt, Willem & Heylen, Freddy & Jacobs, Arthur, 2023. "Coping with demographic change: macroeconomic performance and welfare inequality effects of public pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 22(3), pages 425-449, July.
    4. Ruppert, Kilian & Schön, Matthias & Stähler, Nikolai, 2024. "Consumption taxation to finance pension payments," Economic Modelling, Elsevier, vol. 130(C).

    More about this item

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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