Confidence and unemployment in the European Union: a lesson from the 2004 enlargement

António Caleiro

doi:10.14195/2183-203x_26_2

Abstract

We use data for the monthly unemployment rate and consumer confidence indicator in the European Union to study whether there is a relationship between unemployment and confidence. Our estimation method is based on a fuzzy logic methodology with a Gaussian membership function. We find a stronger relationship between unemployment and confidence than it is apparent. We show in an ex-post prediction study that this relationship did not change, in a significant way, after the 2004 enlargement of the European Union. This fact constitutes a lesson for the post-2007 enlargement period. The link between unemployment and confidence has important policy implications given its relevance, in particular for the (latest call for a new start of the) Lisbon Strategy.

Highlights

Introduction and MotivationIn March 2000 the European Council of the European Union (EU) launched the so-called Lisbon Strategy
The EU adopted a package of measures to promote growth and employment and set ambitious targets regarding the position of the EU economy in order to make it “the most dynamic and competitive knowledge-based economy in the world” by 2010
We find that the unemployment rate is a good proxy variable – in the econometrical sense of the term– of consumer confidence

Summary

Introduction and Motivation

In March 2000 the European Council of the European Union (EU) launched the so-called Lisbon Strategy. Given that we obtained a much stronger correlation between the unemployment rate and consumer confidence than that by a conventional statistical approach and that the results of the out-of-sample prediction exercise were, at a minimum, acceptable, that allow us to state that the results indicate a causal link from the unemployment rate to consumer confidence. Speaking, this result means that unemployment cannot be discarded from the key elements explaining confidence.

The Data

The Relationship between Confidence and Unemployment

The Impact of the May 2004 Enlargement of the EU

Conclusion and Discussion