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Some Evidence on the Relevance of the Chain-reaction Theory in Selected Countries

  • Hofer, Helmut

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Schwarzbauer, Wolfgang

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Schuh, Ulrich

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Snower, Dennis J.

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

In this paper we challenge the traditional labour market view, which argues that unemployment is determined in the long-term by its equilibrium rate, which in turn is affected by permanent shocks of some exogenous variables. In our empirical approach we decompose the dynamics of employment and labour force into transitory and permanent components. We estimated a small labour market model using VAR techniques. By simulating the model we are able to quantify the relative importance of the permanent and transitory components for the movements of the unemployment rate in four countries (Austria, France, UK, and USA). We find that the transitory component has a significant impact on unemployment only in the US. In contrast to that the permanent component appear to influence unemployment significantly in all included countries. In combination with the observation that labour market dynamics differ between countries, this may have powerful policy implications.

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File URL: http://www.ihs.ac.at/publications/eco/es-207.pdf
File Function: First version, 2007
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 207.

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Length: 31 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ihs:ihsesp:207
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References listed on IDEAS
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  1. Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
  2. Karanassou, Marika & Sala, H├ęctor & Snower, Dennis J., 2003. "Unemployment in the European Union: A dynamic reappraisal," Open Access Publications from Kiel Institute for the World Economy 2933, Kiel Institute for the World Economy (IfW).
  3. repec:fth:inseep:9645 is not listed on IDEAS
  4. Marika Karanassou & Dennis Snower, 1996. "Is the Natural Rate a Reference Point?," Archive Discussion Papers 9623, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. 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.
  6. 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.
  7. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
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