The role of confidence measures in European unemployment dynamics

Marta Garcia-Rodriguez and Clemente Pinilla-Torremocha
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Marta Garcia-Rodriguez: Bank of Spain
Clemente Pinilla-Torremocha: Bank of England

No 1182, Bank of England Staff Working Paper series from Bank of England

Abstract: We show that the joint behaviour of confidence measures and unemployment in a panel of European countries favours a view of labour market fluctuations driven largely by a shock that does not affect unemployment contemporaneously but affects it persistently over business‑cycle horizons and explains the major share of the forecast error variance of confidence measures. This shock is captured in firm and household surveys and is almost perfectly correlated (-0.95) with non-technological disturbances driving the long-run behaviour of unemployment, but only modestly correlated with shocks affecting long-run productivity. One structural interpretation is that it represents news about future non-technological fundamentals, which is first captured in confidence measures. This shock accounts for 50% of unemployment variance at business-cycle frequency. It behaves as a mildly inflationary transitory demand shock – raising investment, wages, interest rates, fiscal surplus, and vacancies – is orthogonal to identified monetary policy shocks, and induces professional forecasters to revise unemployment expectations downward.

Keywords: Non‑technological news shocks; unemployment fluctuations; confidence measures; panel favar; mixed‑frequencies. (search for similar items in EconPapers)
JEL-codes: C32 D83 E24 E30 (search for similar items in EconPapers)
Pages: 70
Date: 2026-05-22
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023304

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