Learning from the Great Divergence in unemployment in Europe during the crisis

Since the mid-2000s there has been an increasing divergence in unemployment rates across EU countries and age groups. We argue that this divergence has to do with labor market institutions when account is made of their interactions with the magnitude and nature of the shocks from the Great Recession and the Eurozone debt crisis. New macro and micro evidence is provided highlighting the importance of these interactions in explaining cross-country differences in labor market adjustment to shocks. Having identified the labor market institutions responsible for this increasing unemployment divergence, we consider what can be done at the EU level to promote institutional convergence. In particular, we discuss a “positive conditionality” approach that could operate also in good times, and not only under recessions, when conditionality is strong, but some reforms may backfire.