Unemployment in the European Union: Institutions, Prices, and Growth

Marika Karanassou (), Hector Sala and Dennis Snower

No 899, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper presents a reappraisal of unemployment movements in the European Union. Our analysis is based on the chain reaction theory of unemployment, which focuses on (a) the interaction among labor market adjustment processes, (b) the interplay between these adjustment processes and the dynamic structure of labor market shocks, and (c) the interaction between the adjustment processes and economic growth. We divide the shocks into institutional variables, price variables, and growth drivers. Estimating a system of labor market equations for a panel of EU countries, we derive the dynamic unemployment responses to each shock. Our analysis permits us to distinguish between the short- and longrun effects of the shocks. Different shocks generate different degrees of “unemployment persistence” (responses to temporary shocks) and “unemployment responsiveness” (responses to permanent shocks). We find that the growth drivers play a dominant role in accounting for the main swings in EU unemployment.

Keywords: unemployment; natural rate; labor market shocks; chain reaction theory; employment; labor force participation; wage determination; dynamic contributions; 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: 38 pages
Date: 2003-10
New Economics Papers: this item is included in nep-eec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Unemployment in the European Union: Institutions, Prices, and Growth (2004)
Working Paper: Unemployment in the European Union: Institutions, Prices, and Growth (2003)
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