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Unemployment in the European Union: a dynamic reappraisal

  • Karanassou, Marika
  • Sala, Hector
  • Snower, Dennis

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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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 20 (2003)
Issue (Month): 2 (March)
Pages: 237-273

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Handle: RePEc:eee:ecmode:v:20:y:2003:i:2:p:237-273
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  2. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
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  8. Bentolila, S. & Saint-Paul, G., 1992. "A Model of Labour Demand with Linear Adjustment Costs," DELTA Working Papers 92-05, DELTA (Ecole normale supérieure).
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  10. Karanassou, Marika & Snower, Dennis J., 1998. "How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory," CEPR Discussion Papers 1826, C.E.P.R. Discussion Papers.
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  16. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  17. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  18. Henry, Brian & Karanassou, Marika & Snower, Dennis J, 2000. "Adjustment Dynamics and the Natural Rate: An Account of UK Unemployment," Oxford Economic Papers, Oxford University Press, vol. 52(1), pages 178-203, January.
  19. Baltagi, Badi H. & Griffin, James M., 1997. "Pooled estimators vs. their heterogeneous counterparts in the context of dynamic demand for gasoline," Journal of Econometrics, Elsevier, vol. 77(2), pages 303-327, April.
  20. Lindbeck, Assar & Snower, Dennis J., 1987. "Union activity, unemployment persistence and wage-employment ratchets," European Economic Review, Elsevier, vol. 31(1-2), pages 157-167.
  21. Pesaran, H. & Smith, R. & Im, K.S., 1995. "Dynamic Linear Models for Heterogeneous Panels," Cambridge Working Papers in Economics 9503, Faculty of Economics, University of Cambridge.
  22. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
  23. Wolfgang HÄRDLE & J. MARRON & L. YANG, 1996. "Discussion," SFB 373 Discussion Papers 1996,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  24. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  25. Giuseppe Bertola & Tito Boeri & Giuseppe Nicoletti (ed.), 2001. "Welfare and Employment in a United Europe: A Study for the Fondazione Rdolofo Debenedetti," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262024837, June.
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