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What determines unemployment in the long run? Band spectrum regression on ten countries

Erik Hegeland () and Josef Taalbi ()
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Erik Hegeland: Department of Economic History and International Relations, Stockholm University

No 203, Lund Papers in Economic History from Lund University, Department of Economic History

Abstract: This paper presents an empirical analysis of the relation between unemployment and macroeconomic performance. A strong correlation has been pointed out before, but a crucial question is over what time-horizon this holds. To the best of our knowledge, no previous cross-country study has shown that there is a long-run relationship between unemployment and macroeconomic performance over a time-period that stretches before the 1960s. To address this issue, we use wavelet analysis to decompose the time series into short, medium and long-run variations, and band spectrum regressions on the relation between unemployment, GDP, investment, long-term interest rate and TFP, covering ten countries 1913-2016. This methodology has several advantages compared to standard econometrical methods and other tools for decomposition. Our results show that unemployment correlates negatively with the long-run components of investment. This suggests that aggregate demand and capital formation inuence long-term labor market outcomes. According to our estimates ca 17-percent of overall variations in unemployment and 29 percent of the long-run variations may be explained by long-run variations in capital formation.

Keywords: unemployment; capital formation; wavelets; multiple equilibria (search for similar items in EconPapers)
JEL-codes: E10 E12 E22 E24 E32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-04-24
New Economics Papers: this item is included in nep-mac
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