Structural unemployment and its determinants in the EU countries

Variables commonly used, in a panel setting, to explain unemployment rate developments (e.g. Bassanini and Duval (2006a, 2006b)) provide similarly good fit for structural unemployment rate, as measured by the Commission services (i.e. the so-called NAWRU). Those variables include labour market structural indicators, thus confirming the impact of labour market structural reforms on the NAWRU. In addition, we find that persistent demand shocks also have a bearing on the NAWRU. Such shocks are related to crisis events (i.e. unwinding of unsustainable developments). In particular, housing boom-bust episodes have statistically significant impacts on the NAWRU. Real interest rate and TFP growth, which controls more generally for the presence of such shocks, also matter. Put together, the explanatory variables account for 90% of the variance of NAWRU, in a 13 EU countries panel covering the period 1985-2009. The tight fit leaves no scope for statistically significant linear trend or period-effects. The paper also presents a new measure of the degree of generosity of unemployment benefit schemes, which has superior explanatory power compared to alternative measures commonly used to account for the role of this variable in similar studies.