Unemployment in the European Union: A Dynamic Reappraisal

Marika Karanassou (), Hector Sala and Dennis Snower

No 531, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines the movements in EU unemployment from two perspectives: (a) the NRU/NAIRU perspective, in which unemployment movements are attributed largely to changes in the long-run equilibrium unemployment rate and (b) the chain-reaction perspective, in which unemployment movements are viewed as the outcome of the interplay between labor market shocks and prolonged lagged adjustment processes. We present an empirical analysis that distinguishes between unemployment movements arising from longrun equilibrium changes and those arising from lagged intertemporal adjustments. This analysis has far-reaching policy implications. Our analysis shows that the rise in EU unemployment over the 1970s and first part of the 1980s was due largely to permanent shocks (especially the rise in working-age population and the decline in capital formation), whereas the unemployment increase in the first part of the 1990s was due largely to temporary shocks (especially the fall in competitiveness and the rise in real interest rates).

Keywords: wage determination; labor force participation; employment; labor market shocks; NAIRU; natural rate; unemployment; intertemporal adjustments; 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)
Pages: 46 pages
Date: 2002-07
New Economics Papers: this item is included in nep-eec, nep-lab, nep-ltv and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published - published in: Economic Modelling, 2003, 20 (2), 237-273

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Journal Article: Unemployment in the European Union: a dynamic reappraisal (2003)
Working Paper: Unemployment in the European Union: A dynamic reappraisal (2003)
Working Paper: Unemployment in the European Union: A Dynamic Reappraisal (2002)
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