What goes up sometimes stays up: shocks and institutions as determinants of unemployment persistence

Abstract

We analyse the determinants of unemployment persistence in four OECD countries by estimating a structural Bayesian VAR with an informative prior based on an insiders/outsiders model. We explicitly insert unemployment benefits and labour taxes so that our identification is not affected by the Faust and Leeper (1997) critique. We find widespread hysteresis: demand shocks play a dominant role in explaining unemployment also in the medium‐run. Moreover real wages have low sensitivity to cyclical fluctuations and to labour market disequilibria. Our results emphasise the real power of the unions and their interactions with structural shocks and other institutions as crucial determinants of hysteresis.

Sources of unemployment in Namibia: an application of the structural VAR approach

“…Algan and André (2002) found that the standard model works well for the USA but performs poorly in capturing the rise of unemployment in France. In addition, Amisano and Serati (2003) also found that unemployment rates in several European countries are affected permanently by demand shocks. Furthermore, Jacobson et al (1997) found that transitory labour demand shocks negligibly affected unemployment in Scandinavian nations.…”

Aggregate Earnings and Macroeconomic Shocks: the Role of Labour Market Policies and Institutions

“…Many studies also point to crosscountry differences in the resilience of employment to shocks -most prominently between the United States and Continental European countries (Burgess et al, 2000, Balakrishnan and Michelacci, 2001, Amisano and Serrati, 2003, Dustmann et al, 2010, Ormerod, 2010. In this context, previous research suggests that structural policy settings might amplify or mitigate the employment effects of shocks and make them more or less persistent (Blanchard andWolfers, 2000, Bassanini andDuval, 2006).…”

Monetary Policy and Swedish Unemployment Fluctuations

“…Algan (2002) finds that the standard model works well for the U.S. but fails to capture the rise of French unemployment. Amisano and Serati (2003) conclude that demand shocks have persistent effects on unemployment rates in several European countries. In their SVAR, the effect of a demand shock dies out in 13-17 quarters in the investigated European countries, compared to 7 quarters in the U.S.…”