The rise in European unemployment: a bargaining perspective

Abstract

Purpose – To investigate the reasons for the persistent rise in European (Euro area) unemployment during the 1990s, especially compared to the USA.Design/methodology/approach – An econometric model of the European labour market is estimated based on the bargaining framework outlined by McDonald and Solow. A data set is constructed by aggregating individual country data. Because of the lack of adequate data, the supply side is treated as an unobserved component and estimated using the Kalman Filter.Findings – The rise in European unemployment is predominately due to the slow and incomplete reaction of the supply side to negative demand shocks in the labour market. The traditional factors which generate low flexibility in the labour market are to blame.Research limitations/implications – The extent to which the differences in unemployment between the Euro area and the USA can be accounted for by differences in labour productivity is identified as an important issue for future research.Originality/value – Th...