Unemployment Shocks Research Articles

Europe vs America: Institutional hysteresis in a simple normative model

We show how the differences in US and European institutions can arise in a normative model. The paper focuses on the labor market and the government's decision to set unemployment benefits in response to an unemployment shock. The government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse “incentive effects” whereby benefits increase unemployment. It is found that when an adverse shock occurs, benefits should be increased most when the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits introduce hysteresis and can help explain why post-oil shock benefits remained high in Europe but not in the US. Desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple (requires the third derivative of the utility function to be non-negative) and self-correcting. Empirical evidence concerning the role of corporatism is discussed.

Europe vs. America: Institutional Hysteresis in a Simple Normative Model

We show how the differences in US and European institutions can arise in a normative model. The paper focuses on the labor market and the government's decision to set unemployment benefits in response to an unemployment shock. The government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse incentive effects whereby benefits increase unemployment. It is found that when an adverse shock occurs, benefits should be increased most when the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits introduce hysteresis and can help explain why post-oil shock benefits remained high in Europe but not in the US. Desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple (requires the third derivative of the utility function to be non-negative) and self-correcting. Empirical evidence concerning the role of corporatism is discussed.

Links between Labor Supply and Unemployment: Theory and Empirics

This paper discusses the various causal relations between unemployment and participation to the labor market, notably for groups with elastic labor supply such as women. A flow model of labor market participation is used to describe how various exogenous variations jointly affect unemployment and participation. Empirical tests based on time-series of OECD countries are proposed. Notably, the model is used to determine short-run identification restrictions of a structural VAR. It concludes that, in some countries, fast rising female participation may have had a moderate short and medium run impact on unemployment rates. A variance decomposition exercise indicates that, in Continental Europe, participation is driven in the short run by unemployment shocks, while in the U.S., it is driven by participation shocks, interpreted as demography or immigration. Unemployment in Europe is driven in the short run by participation shocks while in the U.S., it is driven by unemployment shocks.

The Incidence of Temporary Employment in Advanced Economies: Why is Spain Different?

This study analyses the determinants of the rate of temporary employment in 15 advanced economies using both macro-level data drawn from the OECD and EUROSTAT databases, as well as micro-level data drawn from the eighth wave of the European Household Panel. Comparative analysis is set out to test different explanations originally formulated for the Spanish case. The evidence suggests that the overall distribution of temporary employment in the analysed countries does not seem to be explicable by the characteristics of national productive structures. This evidence seems at odds with previous interpretations based on segmentation theories. As an alternative explanation, two types of supply-side factors are tested: crowding-out effects and educational gaps in the workforce. Both seem ill suited to explain the distribution of temporary work in the analysed economies. Institutional factors do, however, seem to play an important role. Multivariate analysis shows that the level of institutional protection in standard employment during the 1980s, together with the degree of coordinated centralization of the collective bargaining system, seem to have a significant impact on the distribution of temporary employment in the countries examined. Yet these institutional variables alone still fail to account for the Spanish difference. The Spanish puzzle seems, however, explicable when an interaction between employment protection in standard contracts and unemployment shocks is accounted for. This interaction is expected from a theoretical standpoint and proves consistent with both country-specific and comparative evidence.

Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?

We show that incorporating consumption commitments into a standard model of precautionary saving can complicate the usual relationship between risk and consumption. In particular, the presence of plausible adjustment costs can cause a mean-preserving increase in unemployment risk to lead to increased consumption. The predictions of this model are consistent with empirical evidence from dual-earning couples. Couples who share an occupation face increased risk as their unemployment shocks are more highly correlated. Such couples spend more on owner-occupied housing than other couples, spend no more on rent, and are more likely to rent than own. This pattern is strongest when the household faces higher moving costs, or when unemployment insurance provides a less generous safety net.

The euro area viewed as a single economy: how does it respond to shocks?

The euro area is a new economic entity, the properties of which are less well known than those of individual countries. Using a recently developed macroeconometric model (AWM), which treats the euro area as a single economy, we document its response to monetary, fiscal, productivity and long-run unemployment shocks. The properties of the estimated model are thereby summarised in terms of these responses. The simulation results and the resulting multipliers appear to be relatively insensitive to the specification of the postulated interest rate setting equation-within the class of functions considered, namely variations around a standard Taylor rule.

Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption

Applying a permanent income model with exogenous liquidity constraints and mortgage behavior, household refinancing when mortgage interest rates are historically high and rising, a persistent empirical puzzle, is explained. Using data from the Panel Study of Income Dynamics, households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25% more likely to refinance, 1991-94. On average, such liquidity-constrained households converted over two-thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted, 1991-94, producing an estimated expenditure stimulus of at least $28 billion.

Does Unemployment Risk Affect Asset Returns? The Long-Run UK Evidence

This paper examines the correlation structure between asset returns and unemployment surprises. Using UK data, it is possible to study this relationship not only over the more economically stable post WWII period, but also during the Great Depression. It is shown that the correlation between stock returns and unemployment shocks is significantly negative during the inter-war years, but not in the period since WWII. This is consistent with theoretical work that suggests that labor income risk concentrated in economic crash states is most likely to resolve the equity premium puzzle.

Do real wages respond asymmetrically to unemployment shocks? Evidence from the U.S. and Canada

Using a set of cointegration and error correction models with asymmetric adjustment, this paper investigates aggregate labor market adjustment in the U.S. and Canada in the post 1973 period. Empirical results show real wages, productivity, and unemployment are cointegrated. Adjustment toward the long-run equilibrium seems to be linear for the U.S. and non-linear for Canada. The dynamic adjustment of real wages to unemployment and productivity shocks show markedly different responses to positive shocks than negative shocks in Canada. However, adjustment in the U.S. is mostly symmetric. This difference between the U.S. and Canadian real wage responses may provide an answer to the recent divergence of unemployment rates between the U.S. and Canada.

A New Explanation For European Unemployment Based On Rational Institutions

We show that European-style hysteresis can arise in a normative model where labor market institutions are determined optimally. We focus on the government’s decision to set unemployment benefits in response to an unemployment shock. The government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse “incentive effects” whereby benefits increase the unemployment rate. It is found that when the shock occurs, benefits should be increased in those economies where the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits can introduce hysteresis in benefit setting and unemployment. A good temporary shock can permanently reduce unemployment by making it optimal to have a cut in unemployment benefits. Desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple (requires the third derivative of the utility function to be non-negative) and self-correcting.

Unemployment Shocks and Income Distribution: How did the Nordic Countries Fare during their Crises?

We study the inequality of disposable income in Denmark, Finland, Norway and Sweden during the late 1980s and early 1990s when unemployment rose dramatically in all four countries. A standard measure of inequality — the Gini coefficient – was surprisingly stable in all countries during this period. By decomposing the Gini into income components, we test hypotheses about the reasons for this stable income distribution. Our most straightforward hypothesis, that rising unemployment benefits counteracted the impact of more unequally distributed earnings, receives only limited support. More complex mechanisms seem to have been at work.JEL classification: D30; D31; J60

Albania in crisis: the predictable fall of the shining star

Part 1 Assessment - the reasons for the crisis: the apparent rapid success of the Balkan tiger the profound crisis in industry difficulties in emerging services the missing pillar - inadequacy of the banking system the unemployment shock impoverishment wages and incomes the avoidance of social dialogue and participation the failure of the mass privatization programme limitations and drawbacks of foreign capital the collapse of the Albanian pyramid. Part 2 Prospects - Albania after the storm: the extent of the destruction a halt to economic activity macroeconomic indicators moving backwards the social abyss reviving production forces reviving life forces.

A Nonparametric Analysis of Regional Unemployment Dynamics in Britain

This paper estimates the probability distribution of relative county unemployment in Britain for the years 1981-1995. We find that the distribution is unimodal in all years, with a falling variance between 1989 and 1994. We use bootstrap methods to determine critical values for the two tails of the distribution, and analyze intra-distribution dynamics. An unemployment shock is defined as a move between a tail and the centre of the distribution (and vice versa). The persistence of a shock is defined by the number of time periods a country stays in a state before switching to another state. We find that positive shocks (those that reduce unemployment) tend to persist longer than negative ones. We also calculate transition probabilities and find that the probability of leaving any given state is very low, and is lower for the state of high relative unemployment than for the state of low relative unemployment.

The market for labour in Israel

Using annual observations for 1960–89, a complete economic model of the Israel labour market is estimated in which the demand for labour varies inversely with real wages, participation varies directly with the real wages and real wages are explained by a phillips curve in which the natural rate of unemployment is a variable. The model suggests that while wages are far from flexible, unemployment shocks die away fairly rapidly. we were unable to model the behaviour of public sector pay and employment.