Possible Impact of the 2008-2009 Economic Crisis on Czech Potential Output Through the Labour Market

Martin Janíčko, Marek Mičúch and Zdeněk Chytil

Acta Oeconomica Pragensia, 2012, vol. 2012, issue 4, 3-25

Abstract: The paper deals with the possible impact of the 2008-2009 financial and economic crisis on the potential output in the Czech Republic. Given the general difficulty in sketching out all the consequences of the crisis itself, the article is primarily focused on the labour market, which is regarded as an important driving force in terms of potential output fall or its growth slowdown. First, principal reasons why the potential output could have been hit by the 2008-2009 crisis are discussed in detail. The paper then analyzes a number of transmission mechanisms through which potential output could be generally impacted by severe recessions. Further, the output gap of the Czech Republic is estimated and a potential output development is drawn up. Finally, an approximate impact of the crisis on the potential product through the labour market is demonstrated. The results show that the potential output in the Czech Republic has been partially and temporarily affected in volume. This is specifically due to an adverse long-term unemployment and, to a much lesser extent, employment behaviour, in both cases seemingly in relation to the recent crisis. Likewise, Okun's law has been found to be relatively weak in the case of the Czech economy, thus further supporting the "hysteresis explanation". However, such a drop in potential output will likely not persist in the long run, provided that appropriate economic policies - in particular aiming at re-integration of long-term unemployed/discouraged workers and an increase in the employment and participation rates - are implemented.

Keywords: potential output; total factor productivity; financial and economic crisis; external economic shocks; labour market hysteresis; human capital investment; discouraged workers (search for similar items in EconPapers)
JEL-codes: E01 E22 E27 E32 F41 J21 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.18267/j.aop.372

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