Is unemployment on steroids in advanced economies?

Bella Gabriel Di, Francesco Grigoli () and Ramírez Francisco
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Bella Gabriel Di: International Monetary Fund, Washington, DC, USA
Ramírez Francisco: Central Bank of the Dominican Republic, Santo Domingo, Dominican Republic

The B.E. Journal of Macroeconomics, 2020, vol. 20, issue 1, 17

Abstract: Conventional macroeconomic theory is based on the idea that demand shocks can only have temporary effects on unemployment, however several European economies display highly persistent unemployment dynamics. The theory of hysteresis points out that, under certain conditions, demand disturbances can have permanent effects. We find strong evidence of unemployment hysteresis in advanced economies since the 1990s. Relying on an identification scheme instigated by an insider/outsider model, we exploit the heterogeneity in impulse responses to demand shocks to investigate what labor institutions soften or amplify these responses. Our results indicate that strengthening labor institutions that promote a faster adjustment of real wages, removing disincentives for firms to hire and for workers to be employed, and improving the matching between labor supply and demand can lessen the effects of adverse demand shocks and lead to a faster reversion of unemployment rates to pre-shock levels.

Keywords: advanced economies; heterogeneous dynamics; hysteresis; panel VAR; unemployment persistence (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Is Unemployment on Steroids in Advanced Economies? (2018)
Working Paper: Is Unemployment on Steroids in Advanced Economies? (2018)
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DOI: 10.1515/bejm-2019-0064

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