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Unemployment in the EU: Institutions, Prices and Growth

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

Abstract

This Paper presents a reappraisal of unemployment movements in the European Union. Our analysis is based on the chain reaction theory of unemployment, which focuses on (a) the interaction among labour market adjustment processes, (b) the interplay between these adjustment processes and the dynamic structure of labour market shocks, and (c) the interaction between the adjustment processes and economic growth. We divide the shocks into institutional variables, price variables, and growth drivers. Estimating a system of labour market equations for a panel of EU countries, we derive the dynamic unemployment responses to each shock. Our analysis permits us to distinguish between the short- and long-run effects of the shocks. Different shocks generate different degrees of ‘unemployment persistence’ (responses to temporary shocks) and ‘unemployment responsiveness’ (responses to permanent shocks). We find that the growth drivers play a dominant role in accounting for the main swings in EU unemployment.

Suggested Citation

  • Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2004. "Unemployment in the EU: Institutions, Prices and Growth," CEPR Discussion Papers 4243, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4243
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    References listed on IDEAS

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    1. Karanassou, Marika & Snower, Dennis J., 2000. "Characteristics of Unemployment Dynamics: The Chain Reaction Approach," IZA Discussion Papers 127, Institute for the Study of Labor (IZA).
    2. 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.
    3. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    4. Karanassou, Marika & Snower, Dennis J, 1998. "How Labour Market Flexibility Affects Unemployment: Long-Term Implications of the Chain Reaction Theory," Economic Journal, Royal Economic Society, vol. 108(448), pages 832-849, May.
    5. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, April.
    6. Karanassou, Marika & Sala, Hector & Snower, Dennis, 2003. "Unemployment in the European Union: a dynamic reappraisal," Economic Modelling, Elsevier, vol. 20(2), pages 237-273, March.
    7. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-629, Special I.
    8. 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.
    9. 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 631-652, Special I.
    10. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
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    Citations

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    Cited by:

    1. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item

    Keywords

    chain reaction theory; dynamic contributions; employment; homogeneous dynamic panels; labour force participation; labour market shocks; natural rate; panel unit root tests; unemployment; wage determination;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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