Unemployment in the EU: Institutions, Prices and Growth

Dennis Snower, Marika Karanassou and Hector Sala

No 4243, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper presents a reappraisal of unemployment movements in the European Union. Our analysis is based on the chain reaction theory of unemployment, which focuses on (a) the interaction among labour market adjustment processes, (b) the interplay between these adjustment processes and the dynamic structure of labour market shocks, and (c) the interaction between the adjustment processes and economic growth. We divide the shocks into institutional variables, price variables, and growth drivers. Estimating a system of labour market equations for a panel of EU countries, we derive the dynamic unemployment responses to each shock. Our analysis permits us to distinguish between the short- and long-run effects of the shocks. Different shocks generate different degrees of ?unemployment persistence? (responses to temporary shocks) and ?unemployment responsiveness? (responses to permanent shocks). We find that the growth drivers play a dominant role in accounting for the main swings in EU unemployment.

Keywords: Unemployment; Natural rate; Labour market shocks; Chain reaction theory; Employment; Labour force participation; Wage determination; Dynamic contributions; Homogeneous dynamic panels; Panel unit root tests (search for similar items in EconPapers)
JEL-codes: E30 E37 J32 J60 J64 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-eec
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Citations: View citations in EconPapers (2)

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