The role of confidence measures in European unemployment dynamics

Marta García-Rodríguez and Clemente Pinilla-Torremocha
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Marta García-Rodríguez: Banco de España
Clemente Pinilla-Torremocha: Bank of England and European Research University

No 2616, Working Papers from Banco de España

Abstract: We show that the joint behavior of confidence measures and unemployment in a panel of European countries favors a view of labor market fluctuations driven largely by a shock that does not affect unemployment contemporaneously but affects it persistently over business-cycle horizons and explains the majority 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 behavior 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 and 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: 75 pages
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2616e

DOI: 10.53479/43425

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