Unemployment Shocks Research Articles

Does higher unemployment lead to greater criminality? Revisiting the debate over the business cycle

A crime epidemic appears to have erupted in many advanced economies, raising questions on whether higher unemployment leads to greater incidence of crime. In this paper, we establish a robust connection between unemployment and crime, considering both violent and non-violent crimes, in a 4 variable time-varying VAR setting in identifying four shocks: unemployment, output, migration fear, and crime shocks. Using data from France and the UK over the time period 1975Q1 to 2013Q4 and 1983Q1 to 2018Q2 respectively, we find significant positive effects of unemployment shocks on crime rates in both countries, particularly so during the times of economic contraction. We also find that crime rates decline during times of economic expansion (in response to a positive shock in GDP growth). Considering shocks in migration fears, we find that migration fears are fuelling higher incidence of crime in France, whereas unemployment shock continues to drive crime rates in the UK. Undertaking further analysis for a single country at quarterly frequency for the UK, and with panel data from 24 countries at annual frequency over the period 1998 to 2016, we support our main hypothesis that higher unemployment rate tends to increase non-violent crime. Our results imply that maintaining stable economic activity is critical in order to stabilize incidence of non-violent crime. These findings have political significance, given the recent unprecedented levels of concern and uncertainty about migration in European countries.

How does the Household Labour Supply Respond to the Unemployment of the Household Head?

AbstractIn this paper, we explore one of the oldest labour market phenomena documented in the literature: the added worker effect. This refers to the labour supply response of secondary earners of the household to the main earner's job losses. Using longitudinal data for Colombia, we find that when the head of the household becomes unemployed, the labour supply of the female partner increases between 9 and 20 percentage points. Such response appears during the first 6 months of the unemployment spell of the household head. In addition, within 1 year of the unemployment shock, household members under college age were more likely to enter the labour market and less likely to be in tertiary education.

A hybrid Phillips curve and consumer confidence: the case of Brazil

The main aim of this paper is to verify the determinants of Brazilian inflation using a hybrid Phillips curve. Its innovation is in its incorporation of consumer confidence and by combining this with the unemployment rate as an explanatory variable in the empirical Phillips curve. The main results show that: (i) the effect of unemployment in reducing inflation occurs when the level of consumer confidence is below 125 and (ii) the level of consumer confidence is negatively influenced by both nominal exchange rate and unemployment shocks. This means that increasing unemployment does not necessarily reduce inflation. The unemployment rate needs to be high enough to reduce consumer confidence to the specific level at which a recessive policy can produce the expected effects.

Opioids and the Labor Market

This paper studies the relationship between local opioid prescription rates and labor market outcomes for prime-age men and women between 2006 and 2016. We estimate the relationship at the most disaggregated level feasible in the American Community Survey in order to provide estimates that include rural areas that have, in some cases, seen particularly high prescription rates. Given the limited time period, it is particularly important to account for geographic variation in both short-term and long-term economic conditions. We estimate three panel models to control for evolving local economic conditions: a difference-in-differences specification, a specification with specific controls for economic conditions, and a model that focuses on a comparison group of place with similar performance in 2000. These modelling approaches find a range of statistically significant and economically substantial results for both prime-age men and women. For example, we find that a 10 percent higher local prescription rate is associated with a decrease in the prime-age labor force participation rate of between 0.15 and 0.47 percentage points for men and between 0.15 and 0.19 percentage points for women, depending on the control strategy. We also estimate effects for narrower demographic groups and find substantially larger estimates for some groups, notably for white and minority men with less than a BA. We also present evidence on reverse causality. We show that a short-term unemployment shock did not increase the share of people misusing prescription opioids and that prescription levels vary substantially within quintiles of longer-term labor market performance. Our estimates are generally robust to estimation within those quintiles of 2000 labor market performance. These results argue against theories of reverse causation that rely on prescriptions rates being higher in labor markets that were already weaker.

Short-run and long-run effects of unemployment on suicides: does welfare regime matter?

Disentangling the immediate effects of an unemployment shock from the long-run relationship has a strong theoretical rationale. Different economic and psychological forces are at play in the first moment and after prolonged unemployment. This study suggests a diverse impact of short- and long-run unemployment on suicides in liberal and social-democratic countries. We take a macro-level perspective and simultaneously estimate the short- and long-run relationships between unemployment and suicide, along with the speed of convergence towards the long-run relationship after a shock, in a panel of 10 high-income countries. We also account for unemployment benefit spending, the share of the population aged 15-34, and the crisis effects. In the liberal group of countries, only a long-run impact of unemployment on suicides is found to be significant (P = 0.010). In social-democratic countries, suicides are associated with initial changes in unemployment (P = 0.028), but the positive link fades over time and becomes insignificant in the long run. Further, crisis effects are a much stronger determinant of suicides in social-democratic countries. Once the broad welfare regime is controlled for, changes in unemployment-related spending do not matter for preventing suicides. A generous welfare system seems efficient at preventing unemployment-related suicides in the long run, but societies in social-democratic countries might be less psychologically immune to sudden negative changes in their professional lives compared with people in liberal countries. Accounting for the different short- and long-run effects could thus improve our understanding of the unemployment-suicide link.

Informational rigidities and the stickiness of temporary Sales

How do retailers react to cost changes? While temporary sales account for 95% of price change in our data, retail prices respond to a wholesale cost increase entirely through the regular price. Sales actually respond temporarily in the opposite direction from regular prices, as though to conceal the price hike. Additional evidence from responses to commodity cost and local unemployment shocks, as well as broader evidence from BLS data, reinforces these findings. Institutional evidence indicates that sales are complex contingent contracts, determined substantially in advance. In a standard price-discrimination model, these institutional practices leave little money ``on the table”.

Revisiting the Link Between Economic Distress, Race, and Domestic Violence.

Male unemployment may decrease the incidence of domestic violence, due to loss of economic power in the relationship, or increase the incidence of domestic violence, due to emotional outbursts fueled by increased stress. We hypothesize that Black men may face a greater loss of expected future earnings after an unemployment shock due to a more unfavorable labor market relative to White men. Consequently, we would expect that Black men would, on net, exhibit a greater reduction (or a smaller increase) in incidences of domestic violence following an employment shock. This study uses mass layoff events reported by the Bureau of Labor Statistics (BLS) at the county level (N = 3,377) for the years 2003-2008. Mass layoff events occur when a firm lays off at least 50 workers and are uncorrelated with individual-level characteristics (N = 28,939 events, affecting N = 5,337,481 individuals). Domestic violence data are taken from the National Archive of Criminal Justice and defined as occurring when an accused perpetrator is charged, but not necessarily convicted. We use a multivariate regression model to estimate how differences in the change in reported incidences of domestic violence by race correlate with changes in mass layoffs by race. We control for the poverty rate, real per capita income, percent Black, percent women, and percent of females laid off. The standard errors are clustered at the county level and include county and time dummies to account for regional and time specific trends. We observe that an increase in the number of Blacks subject to a mass layoff event do exert a negative associated influence on domestic violence while layoffs of White men exert a positive influence. Our results shed light on how the influence of economic uncertainty on incidences of domestic violence has been found to be positive in some previous research but negative in other research.

An unemployment insurance scheme for the euro area? A comparison of different alternatives using microdata

We analyze different alternatives how a common unemployment insurance system for the euro area (EA) could be designed and assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we highlight and quantify the trade-off between automatic stabilization e¤ects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the un- employment shock in the recent crisis. However, 5 member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that claw-back mechanisms and contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance e¤ects. We also discuss moral haz- ard issues at the level of individuals, the administration and economic policy.

Geographic Inequality of Economic Well-being among U.S. Cities: Evidence from Micro Panel Data

We analyze the geographic inequality of economic well-being among U.S. cities by utilizing a novel measure of quantity based product-level economic well-being, i.e., the number of goods and services that can be purchased by consumers with an average city wage. We find a considerable cross-city dispersion in the economic well-being and the geographic dispersion has been on the steady rise since the mid-1990s for most goods and services under study. Strong geographic correlations exist in the local economic well-being and our empirical analysis based on a Global VAR (GVAR) model suggests that national shocks are an important source behind it. On average, about 30-35% of the variance of local well-being is explained by common national shocks, but the impact of common national shocks varies considerably across products, albeit to a lesser extent across cities. Nationwide unemployment shock, for example, has a stronger effect in the products whose prices are adjusted more frequently and in the cities that have a larger fraction of high-skill workers. Taken together, our results indicate that the geographic inequality of economic well-being observed in the U.S. has proceeded over time mainly through the products with more flexible price adjustments and in the cities with higher concentration of skilled workers.

Mortgage debt and household vulnerability

PurposeThis paper aims to study the financial vulnerability of the Spanish households derived from their primary residence mortgage debt payments. This paper shown as the economic and financial crisis triggered after the burst of the housing bubble brought an unemployment shock and a fall in the disposable family income, which alarmingly aggravated the financial vulnerability of the mortgaged households. Consequently, the number of financially vulnerable households almost doubled.Design/methodology/approachEconometric model of discrete election.FindingsThe most vulnerable households – and therefore those with a higher risk of mortgage payment default – are those whose family head is a married and self-employed female. In contrast, in social housing the mortgaged households have been less vulnerable in the context of economic and financial crisis and unlike what would have been initially expected, higher education levels have not acted as a protective factor against households’ financial vulnerability.Originality/valueThere is a great need to understand how the financial health of the mortgaged families that bought their primary residence has deteriorated in a context of significant changes in macroeconomic conditions. This need is specially pressing in a country such as Spain which is one of the OECD’s countries with a higher rate of household property and which shows a sector of highly mortgaged households.

Consumption, unemployment and the Great Recession

Purpose – The purpose of this paper is to test whether households with members that experience job loss shocks are able to protect their previous level of consumption. The paper also tests whether consumption protection is affected when spells persist through time. Design/methodology/approach – The paper estimates an intertemporal consumption model, where households try to smooth their marginal utility over time. For that purpose it analyses Spanish household budget surveys that span a long period, 1999-2012, including the Great Recession. Unlike most consumption datasets, this microdata is designed as a panel and provides detailed information for all consumption categories as well as household members’ labour status. Findings – The paper finds that consumption smoothing is dependent on the household member facing the unemployment transition. In particular, only main breadwinner’s unemployment transitions affects consumption smoothing. It also shows that the consumption drop persists beyond the period of the job loss for ongoing spells, although it follows a decreasing pattern. Finally, the estimation results are stable over the business cycle. Practical implications – The results suggest that Spanish households are not capable of fully insuring against main breadwinner’s unemployment shocks. Further, the results show that this effect remains up to two years for ongoing unemployment spells. Thus these results highlight a welfare loss by Spanish households with unemployed members. Originality/value – The paper extends the usual analysis of job loss shocks by the main breadwinner to include the cases of both the spouse and the rest of household members, who tend to account for most unemployment. Further, it tests for unemployment persistence. Finally, it checks the sensitivity of the results to the business cycle, including the Great Recession.

Macroeconomic Conditions and Health: Inspecting the Transmission Mechanism

This paper studies the effects of labor market conditions on individual- level health, investigating the factors that moderate and mediate this relationship. Using a large and representative sample of individuals in Italy between 1993 and 2012, we shed light on the transmission mechanism, focusing on the role played by health behaviors (smoking, alcohol consumption, physical activity, eating habits) and economic stress. We find that, overall, higher local unemployment negatively affects health, with a dynamic response that differs across health conditions. Employment status and educational level play a significant role as moderators of these effects. Eating habits, in addition to economic stress, are found to play a key role in the transmission mechanism, while physical activity acts as a buffer against the adverse health effects of unemployment shocks.

Unemployment Risk and Over-Indebtedness

We study how unemployment affects the over-indebtedness of households using the new European Household Finance and Consumption Survey (HFCS). First, we assess the role of different labor market statuses (i.e. employed, unemployed, disabled, retired, etc.) and other household characteristics (i.e. demographics, housing status, household wealth and income, etc.) to determine the likelihood of over-indebtedness. We explore these relationships both at the Euro area level and through country-specific regressions. This approach captures country-specific institutional effects concerning all the different factors which can explain household indebtedness in its most severe form. We also examine the role that each country’s legal and economic institutions play in explaining these differences. The results of the regressions across all countries show that the odds of being over-indebted are much higher in households where the reference person is unemployed. These odds ratios remain fairly stable across different over-indebtedness indicators and specifications. Interestingly, we find similar results for secured debt only. Turning to country specific results, the role of unemployment varies widely across countries. In Spain, France or Portugal, for example, the odds ratio for the unemployed group is just below 2, whereas in Austria, Belgium, or Italy the odds ratio is higher than 4. Secondly, we situate the analysis in a macro-micro frame to identify households and countries that are especially vulnerable to adverse macroeconomic shocks in the labor market. For the Euro area, we find that the percentage of households plagued by over-indebtedness increased by more than 10%, suggesting that another unemployment shock could have a major impact on the financial solvency of Euro area households. Finally, the impact of this shock on single-headed households is much higher than on couple-headed ones.

The Relationship between Net Migration and Unemployment: The Role of Expectations

This paper examines the impact of unemployment on migration. In a theoretical model, we show that unemployment, per se, does not affect migration. Rather, migration only occurs when unemployment shocks force residents to update their expectations of the area’s unemployment rate. Once these expectations change, migration reallocates labor to bring the economy back to equilibrium. Testing this theory, we devise an empirical strategy using state-level data in the US from 2000 to 2010. We estimate that the impact of unemployment shocks outside of expectations is over 25 times greater than the impact of unemployment shocks that are within expectations.

Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession

Data from the 2009 Internet Survey of the Health and Retirement Study show that many US households experienced large capital losses in housing and financial wealth, and that 5% of respondents lost their job during the Great Recession. For every loss of 10% in housing and financial wealth, the estimated drop in household expenditure was about 0.56% and 0.9%, respectively. Those who became unemployed reduced spending by 10%. In line with predictions of standard inter-temporal choice models, households who perceived the stock market shock to be permanent adjusted spending much more than those who perceived the shock to be temporary.

Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession

We use data from the 2009 Internet Survey of the Health and Retirement Study to examine the consumption impact of wealth shocks and unemployment during the Great Recession in the US. We find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents have lost their job. As a consequence of these shocks, many households reduced substantially their expenditures. We estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year’s time, and those who do not. In line with the predictions of standard models of intertemporal choice, we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks.

Unemployment Risk and Over-Indebtedness: A Micro-Econometric Perspective

We study how unemployment effects the over-indebtedness of households using the new European Household Finance and Consumption Survey (HFCS). First, we assess the role of different labor market statuses (i.e. employed, unemployed, disabled, retired, etc.) and other household characteristics (i.e. demographics, housing status, household wealth and income, etc.) to determine the likelihood of over-indebtedness. We explore these relationships both at the Euro area level and through country-specific regressions. This approach captures country-specific institutional effects concerning all the different factors which can explain household indebtedness in its most severe form. We also examine the role that each country’s legal and economic institutions play in explaining these differences. The results of the regressions across all countries show that the odds of being over-indebted are much higher in households where the reference person is unemployed. These odds ratios remain fairly stable across different over-indebtedness indicators and specifications. Interestingly, we find similar results for secured debt only. Turning to country specific results, the role of unemployment varies widely across countries. In Spain, France or Portugal, for example, the odds ratio for the unemployed group is just below 2, whereas in Austria, Belgium, or Italy the odds ratio is higher than 4. Secondly, we situate the analysis in a macro-micro frame to identify households and countries that are especially vulnerable to adverse macroeconomic shocks in the labor market. For the Euro area, we find that the percentage of households plagued by overindebtedness increased by more than 10%, suggesting that another unemployment shock could have a major impact on the financial solvency of Euro area households. Finally, the impact of this shock on single-headed households is much higher than on couple-headed ones.

An Unemployment Insurance Scheme for the Euro Area? A Comparison of Different Alternatives Using Micro Data

We analyze different alternatives how a common unemployment insurance system for the euro area (EA) could be designed and assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we highlight and quantify the trade-off between automatic stabilization effects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the unemployment shock in the recent crisis. However, 5 member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that claw-back mechanisms and contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also discuss moral hazard issues at the level of individuals, the administration and economic policy.

Effects of the Asian Financial Crisis on the Relationship between Capital Structure and Employee Payments: Evidence of a Natural Experiment

This study investigates the effects of the Asian financial crisis on the relationship between capital structure and employee wages, using the crisis as a natural experiment in a leading emerging market. The unemployment rate increases during the Asian financial crisis owing to massive layoffs and the bankruptcy of many firms. This unemployment rate shock is an exogenous shock in the individual firms’ perspectives. We show that the increased unemployment rate during the Asian financial crisis weakens the negative relationship between debt ratios and employee wages. During high unemployment periods, it becomes difficult for employees to find alternative new jobs. Consequently, employees require highly levered firms to pay high wages in order to compensate for their human capital risk. This research confirms the time-varying relationship between firms’ leverage and employee wages according to the unemployment rate without the endogeneity problem.

An Unemployment Insurance Scheme for the Euro Area? A Comparison of Different Alternatives Using Micro Data

We analyze different options for the design of a common unemployment insurance system for the euro area (EA). We assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we quantify the trade-off between automatic stabilization effects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the unemployment shock in the recent crisis. However, four member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insur-ance effects. We also study heterogeneous effects within countries and discuss moral hazard issues at the level of individuals, the administration and economic policy.