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

Helmut Hofer, Robert M. Kunst (), Wolfgang Schwarzbauer (), Ulrich Schuh and Dennis Snower ()
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Helmut Hofer: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria
Ulrich Schuh: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria

No 207, Economics Series from Institute for Advanced Studies

Abstract: 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.

Keywords: Unemployment; Natural rate hypothesis; Labour markets; Employment; Adjustment costs (search for similar items in EconPapers)
JEL-codes: J32 J60 J64 E30 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2007-05
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