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Characteristics of Unemployment Dynamics. The Chain Reaction Approach

  • Karanassou, Marika

    (Department of Economics, Queen Mary and Westfield College, London, United Kingdom)

  • Snower, Dennis J.

    (The Kiel Institute for the World Economy, Kiel, Germany)

The aim of this paper is to analyze and estimate salient characteristics of unemployment dynamics. Movements in unemployment are viewed as "chain reactions" of responses to labour market shocks, working their way through systems of interacting lagged adjustment processes. In the context of estimated labour market systems for Germany, the UK, and the US, we construct aggregate measures of unemployment responses to temporary and permanent shocks. These measures are temporal and quantitative. Furthermore, we estimate the contributions of individual lagged adjustments to these aggregate measures. Our empirical results indicate that lagged adjustment processes play an important part in explaining how temporary and permanent shocks affect unemployment, that temporary and permanent shocks can yield quite different inter-country comparisons of unemployment effects, and that the quantitative and temporal measures can also yield markedly different inter-country comparisons.

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File URL: http://www.ihs.ac.at/publications/eco/es-205.pdf
File Function: First version, 2007
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 205.

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Length: 52 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:ihs:ihsesp:205
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  1. Lindbeck, Assar & Snower, Dennis J., 1987. "Union activity, unemployment persistence and wage-employment ratchets," European Economic Review, Elsevier, vol. 31(1-2), pages 157-167.
  2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
  3. repec:fth:inseep:9645 is not listed on IDEAS
  4. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
  5. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  6. Layard, R. & Bean, C., 1988. "Why Does Unemployment Persist?," Papers 321, London School of Economics - Centre for Labour Economics.
  7. Lindbeck, Assar & Snower, Dennis J, 1994. "How Are Product Demand Changes Transmitted to the Labour Market?," Economic Journal, Royal Economic Society, vol. 104(423), pages 386-98, March.
  8. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January.
  9. Lindbeck, Assar & Snower, Dennis J, 1990. "Cooperation, Harassment, and Involuntary Unemployment: Reply," American Economic Review, American Economic Association, vol. 80(3), pages 631-36, June.
  10. Nickell, S J, 1978. "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(180), pages 329-45, November.
  11. Lindbeck, Assar & Snower, Dennis J, 1987. "Strike and Lock-Out Threats and Fiscal Policy," Oxford Economic Papers, Oxford University Press, vol. 39(4), pages 760-84, December.
  12. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
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