Cointegration and common trends on the West German labour market

Abstract

In this paper we analyze the West German labour market by means of a cointegrated structural VAR model. We find sensible stable long-run relationships that are interpreted as a labour demand, a wage setting and a goods market equilibrium. In order to study the dynamic behaviour of the model we identify two common trends that push unemployment. We find that goods market shocks have only transitory impacts on unemployment. In the long run, it is almost equally determined by technology and labour supply factors. However, transitory shocks have major importance in the shorter run since adjustment processes are rather sluggish.