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Does the interaction between shocks and institutions solve the OECD unemployment puzzle ? A theoretical and empirical appraisal

  • Aurélien Gaimon

    (École Nationale de la Statistique et de l'Administration Économique (ENSAE))

  • Vincent Lapegue

    (INSEE Paris)

  • Paola Veroni

    (OFCE)

  • Noé N'Semi

    (École Nationale de la Statistique et de l'Administration Économique (ENSAE))

  • Frédéric Reynès

    (OFCE (OFCE))

  • Maël Theulière

    (INSEE Paris)

This paper adds to the already vast economic literature on the respective role of shocks and institutions in unemployment dynamics. Conclusions of existing studies widely diverge. Such divergences are mainly due to a weak theoretical framework underlying the models which have been estimated. We have tried to overcome such weaknesses by relying on a structural model based on a Phillips curve in order to obtain a reduced form unemployment equation. Once estimated, this reduced form accounts for the importance of macroeconomic shocks in explaining changes in unemployment. The introduction of institutional variables and the estimation of three potential effects on unemployment (level, persistence and sensitivity to shocks) lead to results, which are consistent with theoretical predictions. Nevertheless, the role of institutions in explaining changes in unemployment is limited. We use a panel data approach by pooling country data in order to disentangle fixed country effects.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2007-34.

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Date of creation: Dec 2007
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Handle: RePEc:spo:wpmain:info:hdl:2441/6120
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  1. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  2. Belot, Michèle & van Ours, Jan C, 2000. "Does the Recent Success of some OECD Countries in Lowering their Unemployment Rates lie in the Clever Design of their Labour Market Reforms?," CEPR Discussion Papers 2492, C.E.P.R. Discussion Papers.
  3. Andrea Bassanini & Romain Duval, 2006. "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions," OECD Social, Employment and Migration Working Papers 35, OECD Publishing.
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  7. Luca Nunziata, 2001. "Labour Market Institutions and the Cyclical Dynamics of Employment," Economics Series Working Papers 1999-W26, University of Oxford, Department of Economics.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
  9. Heyer, Eric & Reynes, Frederic & Sterdyniak, Henri, 2007. "Structural and reduced approaches of the equilibrium rate of unemployment, a comparison between France and the United States," Economic Modelling, Elsevier, vol. 24(1), pages 42-65, January.
  10. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  12. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  13. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
  14. Thomas I. Palley, . "The Role of Institutions and Policies in Creating High European Unemployment: The Evidence," Economics Working Paper Archive wp_336, Levy Economics Institute.
  15. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  16. Assar Lindbeck, 1993. "Unemployment and Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121751, June.
  17. Yannick L'horty & Christophe Rault, 2003. "Why Is French Equilibrium Unemployment So High?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 127-156, May.
  18. Belot, M.V.K. & van Ours, J.C., 2001. "Unemployment and Labor Market Institutions : An Empirical Analysis," Discussion Paper 2001-50, Tilburg University, Center for Economic Research.
  19. Odile Chagny & Frédéric Reynès & Henri Sterdyniak, 2002. "The equilibrium rate of unemployment : a theoretical discussion and an empirical evaluation for six OECD countries," Documents de Travail de l'OFCE 2002-04, Observatoire Francais des Conjonctures Economiques (OFCE).
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  22. Belot, M.V.K. & van Ours, J.C., 2001. "Unemployment and labor market institutions : An empirical analysis," Other publications TiSEM 29a3de46-e7bc-4b3d-abe5-b, School of Economics and Management.
  23. repec:ner:tilbur:urn:nbn:nl:ui:12-89213 is not listed on IDEAS
  24. repec:dgr:kubcen:200150 is not listed on IDEAS
  25. Bertola, Giuseppe & Blau, Francine D & Kahn, Lawrence, 2001. "Comparative Analysis of Labour Market Outcomes: Lessons for the US from International Long-Run Evidence," CEPR Discussion Papers 3023, C.E.P.R. Discussion Papers.
  26. Nickell, Stephen, 1998. "Unemployment: Questions and Some Answers," Economic Journal, Royal Economic Society, vol. 108(448), pages 802-16, May.
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