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Re-examining the Structural and the Persistence Approach to Unemployment





This paper examines the relative importance of the structural and the persistence approach to unemployment. We set out a standard imperfect competition model that decomposes observed unemployment into a structural and a persistent cyclical component. The natural rate of unemployment is treated as an unobserved variable that has observable effects on the measured unemployment rate, output and prices. The multivariate unobserved component model is estimated for the US and the euro area using Bayesian techniques and the Kalman filter. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is somewhat lower in the US but demand shocks seem to be more important in explaining variation of unemployment.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/383.

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Length: 28 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:rug:rugwps:06/383
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  1. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, July.
  2. Bianchi, Marco & Zoega, Gylfi, 1995. "Unemployment Persistence : Does the Size of the Shock Matter ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1995014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  4. Salemi, Michael K, 1999. "Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-25, Jan.-Feb..
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  6. 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 832-49, May.
  7. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
  8. Silvia Fabiani & Ricardo Mestre, 2004. "A system approach for measuring the euro area NAIRU," Empirical Economics, Springer, vol. 29(2), pages 311-341, 05.
  9. Roed, Knut, 1997. " Hysteresis in Unemployment," Journal of Economic Surveys, Wiley Blackwell, vol. 11(4), pages 389-418, December.
  10. Francesco Daveri, 2002. "Labor Taxes and Unemployment: a Survey of the Aggregate Evidence," CeRP Working Papers 18, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  11. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
  12. Pantula, Sastry G, 1991. "Asymptotic Distributions of Unit-Root Tests When the Process Is Nearly Stationary," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(1), pages 63-71, January.
  13. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  14. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
  15. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  16. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  17. David H. Papell & Christian J. Murray & Hala Ghiblawi, 2000. "The Structure of Unemployment," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 309-315, May.
  18. 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 C1-33, March.
  19. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  20. Fabrice Orlandi & Karl Pichelmann, 2000. "Disentangling trend and cycle in the EUR-11 unemployment series," European Economy - Economic Papers 140, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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