Unemployment across the Euro Area: The Role of Shocks and Labor Market Institutions

Zhe Wang (zhe.wang@pgr.reading.ac.uk)
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Zhe Wang: Department of Economics, University of Reading

No em-dp2020-05, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: This paper analyses the impact of shocks and labor market institutions on unemployment across the Euro Area (EA) from 1999 to 2013. Specifically, I apply an empirical methodology to identify the direct effects of shocks and labor market institutions on unemployment, on the one hand, and the indirect effects of labor market institutions on changing the transmission of shocks to unemployment, on the other hand. The shocks consist of: 1) total factor productivity (TFP) shocks, 2) the real long-term interest rate, 3) labor demand shocks, 4) ECB money supply shocks and 5) ECB unsystematic monetary policy shocks. The labor market institutions cover the unemployment benefit system, active labor market policies (ALMPs), employment protection laws (EPLs), the system of wage determination and the labor tax wedge. The results suggest that the real interest rate and labor demand shocks significantly affect the unemployment rate in the EA. As for labor market institutions, EPLs play a favorable role in reducing unemployment. In contrast, a higher tax wedge tends to have an adverse effect on unemployment, not only directly increasing unemployment but also indirectly amplifying the effects of shocks on unemployment.

Keywords: Unemployment; Shocks; Labor market institutions; Interactions; Monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E52 F45 J08 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-04-01
New Economics Papers: this item is included in nep-eec, nep-lab, nep-mac and nep-ure
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