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The role of confidence measures in European unemployment dynamics

Author

Listed:
  • Marta García-Rodríguez

    (Banco de España)

  • Clemente Pinilla-Torremocha

    (Bank of England and European Research University)

Abstract

We show that the joint behavior of confidence measures and unemployment in a panel of European countries favors a view of labor market fluctuations driven largely by a shock that does not affect unemployment contemporaneously but affects it persistently over business-cycle horizons and explains the majority of the forecast error variance of confidence measures. This shock is captured in firm and household surveys and is almost perfectly correlated (-0.95) with non-technological disturbances driving the long-run behavior of unemployment, but only modestly correlated with shocks affecting long-run productivity. One structural interpretation is that it represents news about future non-technological fundamentals, which is first captured in confidence measures. This shock accounts for 50% of unemployment variance at business-cycle frequency. It behaves as a mildly inflationary and transitory demand shock, raising investment, wages, interest rates, fiscal surplus and vacancies, is orthogonal to identified monetary policy shocks, and induces professional forecasters to revise unemployment expectations downward.

Suggested Citation

  • Marta García-Rodríguez & Clemente Pinilla-Torremocha, 2026. "The role of confidence measures in European unemployment dynamics," Working Papers 2616, Banco de España.
    • Handle: RePEc:bde:wpaper:2616e
    DOI: https://doi.org/10.53479/43425
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    References listed on IDEAS

    as
    1. F. Di Pace & K. Mitra & S. Zhang, 2021. "Adaptive Learning and Labor Market Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 441-475, March.
    2. Nicolau, João, 2002. "Stationary Processes That Look Like Random Walks— The Bounded Random Walk Process In Discrete And Continuous Time," Econometric Theory, Cambridge University Press, vol. 18(1), pages 99-118, February.
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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