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Does the interaction between shocks and institutions solve the OECD shocks and institutions solve the OECD Unemployment Puzzle ? A Theoritical and Empirical Appraisal

Author

Listed:
  • Frédéric Reynès

    (Nederlandse Organisatie voor Toegepast Natuurwetenschappelijk Onderzoek)

  • Paola Veroni

    (Observatoire français des conjonctures économiques)

  • Aurélien Gaimon

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

  • Vincent Lapegue

    (INSEE Paris)

  • Noé N'Semi

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

  • Maël Theulière

    (INSEE Paris)

Abstract

This paper provides a theoretical and empirical appraisal of the shocks-institutions controversy as an explanation of unemployment heterogeneity in OECD countries. Since the influential work of Blanchard and Wolfers (2000), many studies have tried to explain the differences in the OECD unemployment rate as the result of interaction between shocks and labour market institutions. Modelling this interaction is viewed as a promising way for understanding the puzzle of unemployment disparities which can be explained by none of the two kinds of variables individually. Indeed, on the one hand, OECD countries have been affected by symmetric shocks and have nevertheless experienced different unemployment dynamics. On the other hand, before the 1970s, all these countries had low unemployment rates in spite of quite different labour market institutions. Using cross section data, these studies test a direct relationship between the unemployment rate, shocks and institutions and thus have the advantage of readily allowing for international comparisons. However, testing a reduced equation of the unemployment rate constitutes also their main drawback as they do not analyze formally the link between the unemployment rate and the wage determination process. As a consequence, empirical results are quite divergent among studies since they often lay on ad hoc specifications that may have little theoretical foundations.

Suggested Citation

  • Frédéric Reynès & Paola Veroni & Aurélien Gaimon & Vincent Lapegue & Noé N'Semi & Maël Theulière, 2008. "Does the interaction between shocks and institutions solve the OECD shocks and institutions solve the OECD Unemployment Puzzle ? A Theoritical and Empirical Appraisal," Sciences Po publications info:hdl:2441/9726, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/9726
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Equilibrium unemployment; Structural model; shock; labour market institutions; OECD; cross-section estimation;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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