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The European Employment Experience

Author

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  • Ljungqvist, Lars
  • Sargent, Thomas J

Abstract

Similar durations but lower flows into unemployment gave Europe lower unemployment rates than the United States until the 1970's. But since 1980, higher durations have kept unemployment rates in Europe persistently higher than in the U.S. A general equilibrium search model with human capital explains how these outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to a parameter that measures a worker's loss of human capital after an involuntary job loss. An increase in that parameter between the 70s and the 80s made workers face more turbulence in labor market outcomes and allows our model to match features of a number of empirical studies showing that workers experienced more earnings volatility after 1980. Our model also explains why, especially among older workers, hazard rates of gaining employment in Europe fall off sharply with the duration of unemployment, and why displaced workers in Europe experience smaller earnings losses and lower re-employment rates than those in the United States. The effects of layoff costs on unemployment rates depend on the proportions of frictional and structural unemployment and therefore on the generosity of unemployment benefits and the amount of microeconomic turbulence facing workers.

Suggested Citation

  • Ljungqvist, Lars & Sargent, Thomas J, 2002. "The European Employment Experience," CEPR Discussion Papers 3543, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3543
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    Cited by:

    1. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2012. "The Political Economy Of Flexicurity," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 684-715, August.
    2. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, "undated". "Cross-skill Redistribution and the Tradeoff between Unemployment Benefits and Employment Protection," Working Papers 2004-26, FEDEA.
    3. Joseph, G. & Pierrard, O. & Sneessens, H. R., 2004. "Job turnover, unemployment and labor market institutions," Labour Economics, Elsevier, vol. 11(4), pages 451-468, August.
    4. Alberto F. Alesina & Edward L. Glaeser & Bruce Sacerdote, 2006. "Work and Leisure in the U.S. and Europe: Why So Different?," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 1-100, National Bureau of Economic Research, Inc.
    5. Jörg Lingens & Klaus Wälde, 2009. "Pareto-Improving Unemployment Policies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 220-245, June.
    6. Lars Ljungqvist, 2003. "European Unemployment: Labour Market Institutions and Economic Turbulence," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(2), pages 07-12, October.
    7. Tito Boeri & Michael Burda, 2004. "Preferences for Rigid versus Individualized Wage Setting in Search Economies with Frictions," Working Papers 262, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. David, Quentin & Janiak, Alexandre & Wasmer, Etienne, 2010. "Local social capital and geographical mobility," Journal of Urban Economics, Elsevier, vol. 68(2), pages 191-204, September.
    9. Wasmer, Etienne, 2002. "Interpreting Europe and US Labor Markets Differences: The Specificity of Human Capital Investments," IZA Discussion Papers 549, Institute of Labor Economics (IZA).
    10. Andrea De Michelis, 2004. "Sand in the wheels of the labor market: the effect of firing costs on employment," International Finance Discussion Papers 796, Board of Governors of the Federal Reserve System (U.S.).
    11. Wolfgang Lechthaler, 2009. "The interaction of firing costs and firm training," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(3), pages 331-350, August.
    12. Ochsen, Carsten, 2005. "Labour market institutions and unemployment revisited," Thuenen-Series of Applied Economic Theory 49, University of Rostock, Institute of Economics.
    13. Jean-Olivier Hairault & François Langot & Thepthida Sopraseuth, 2006. "Le double dividende des politiques incitatives à l'allongement de la durée de vie active," Revue économique, Presses de Sciences-Po, vol. 57(3), pages 449-460.
    14. Yu‐Fu Chen & Michael Funke, 2005. "Non‐Wage Labour Costs, Policy Uncertainty And Labour Demand – A Theoretical Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(5), pages 687-709, November.
    15. Heidi Soininen, 2007. "Finnish Evidence of Changes in Labor Market Matching," Finnish Economic Papers, Finnish Economic Association, vol. 20(1), pages 57-71, Spring.
    16. Wasmer, Etienne, 2003. "Interpreting European and US Labour Market Differences: The Specificity of Human Capital Investments," CEPR Discussion Papers 3780, C.E.P.R. Discussion Papers.
    17. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo.
    18. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.
    19. Angela Birk, 2006. "Method to Find the VARs Easily," Departmental Working Papers 2006-11, Department of Economics, Louisiana State University.

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    More about this item

    Keywords

    europe; layoff costs; unemployment; unemployment compensation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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