Revisiting the Okun relationship

Our article revisits the Okun relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985–2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers but also it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate but it will also have the distributional effect of lowering youth unemployment.     

WHAT CAN CHANGES IN STRUCTURAL FACTORS TELL US ABOUT UNEMPLOYMENT IN EUROPE?

This paper examines the impact of temporal variation in labour market institutions and other structural factors on unemployment in Europe. A system comprising a labour demand and a wage equation is estimated on pooled time‐series data for the six largest EU countries for the 1980s and 1990s. The results suggest that changes in regional mismatch, trade union density and the ratio between consumer and producer prices are positively associated with structural unemployment. This result is robust to a wide variety of different specifications. No consistent role is found for other institutional factors (such as social security benefits, employment security and minimum wage).     

Analysis of wage flexibility across the Euro Area: evidence from the process of convergence of the labour income share ratio

This article analyses wage flexibility as a factor in the unemployment rate across 12 Euro Area countries. We use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run. This measure is calculated using a hybrid New Keynesian Phillips curve. Additionally, by using spatial econometrics, we can incorporate into the study the interdependence in the inflation among the countries. As a result, we identify countries that might see an improvement in their employment rates by improving their wage flexibility. We also identify countries with high unemployment that is not a consequence of a lack of wage flexibility.     

Keynes,investment, unemployment and expectations

In Keynes’ General Theory, investment determines effective demand, which determines unemployment and the labour market plays a negligible role. In New Keynesian models, labour market institutions determine the natural rate of unemployment and the speed at which unemployment adjusts to it. Investment is mostly ignored as a key variable behind the problem of high unemployment, despite a strong empirical association between investment and unemployment. We discuss the evolution of the ‘Keynesian’ model, and how in the process of domesticating the General Theory, the central relationship between unemployment and investment and the role of the state of confidence was bred out of the model. We then present some evidence of the centrality of investment and expectations to the long‐term evolution of unemployment in OECD countries. We also argue that recent results in finance, which find that individuals do not behave rationally and, moreover, that there may be no basis for rational calculation, provides support for Keynes’s notion that animal spirits play a central role in investment.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

中国城镇人口失业与性别的收入差异

在以往的数十年间,与世界上其它国家相比,中国城镇就业人口的性别差异并不是很大,但20世纪90年代以来的大规模失业有可能打破这-局面。利用oaxaca分解方法和2003年的《城镇居民再就业状况调查》数据对再就业者的性别工资差异进行了定量分析,发现再就业者在失业前就存在着性别的工资差异,而失业经历使得这-差异更加显著。这-结论的政策含义是中国政府应该实施更有利于女性的再就业政策。     

Political‐Economic Regime and the Wage Curve: Evidence from Chile, 1957–96

This paper tests whether a wage curve—a negative relationship between the level of unemployment and the level of pay—existed in Chile during 1957–96. The analysis is divided into two periods. For 1957–73, during inward‐led development, we reject the existence of a wage curve. For 1974–96, when the economy opened, state‐run industries were privatised and labour rights weakened, we find a wage curve of ?0.08. Based on this finding we conclude that the unemployment–pay elasticity in the post‐reform period is similar to the ?0.07 to ?0.10 wage curve found in other western, capitalist countries. Disaggregating the analysis by group, we find that women, non‐university educated workers and public sector workers have suffered more from unemployment. Yet informal sector workers have not experienced pay drops as a result of unemployment, contradicting the hypothesis that the informal sector acts as a buffer during economic downturns.     

The Beveridge curve in Europe: new evidence using national and regional data

The Beveridge curve depicts the empirical negative relationship between job vacancy rate and unemployment rate, and reflects the efficiency of the job matching process. Movements along a fixed downward sloping Beveridge curve are associated with cyclical shocks, while shifts of the curve arise from structural factors that alter the matching efficiency between job vacancies and unemployed workers. National and regional data on job vacancies and unemployment are combined to estimate the Beveridge curves of five European countries and their regions, focusing on the period 1975 to 2004. I also analyse whether shifts in European Beveridge curves are due to changes in the composition of the unemployed pool, labour market rigidities or cyclical and structural shocks. The empirical evidence suggests that changes in labour market rigidities, long term unemployment, as well as cyclical shocks are responsible for outward shifts in European Beveridge curves. I also find evidence of nonlinearities in the relation between unemployment and labour market institutions.     

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: D 30; D 31; J 60     

Understanding the Determination of Severance Pay: Mandates,Bargaining, and Unions*

A substantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search-and-matching model with risk-averse workers. Individual bargaining results in levels of severance pay that provide full insurance, but also depend on unemployment benefits and job-finding rates. Unions also choose full insurance. Because their higher wage demands reduce job creation, this requires higher severance pay. Severance pay observed in eight European countries, to which we calibrate the model, lies between predictions from the bargaining and union scenarios.     

The time-frequency dependence of unemployment on real input prices: a wavelet coherency and partial coherency approach

ABSTRACT

While the dependence of unemployment on real oil price and real interest rate is an important issue that has been addressed only in the time dimension, little is known about the movements of real input prices and their impact on unemployment in the time-frequency space. With a continuous wavelet coherency and partial coherency approach and monthly data of Japan and US from January 1960 to May 2017, this paper contributes to the literature by examining the characteristics of the dependence of unemployment on real input prices across frequencies and over time. The empirical results indicate that: First, a rise in real oil price leads to productivity growth slowdown and unemployment increase at the scale of 16–64 months after 1990 for Japan and 8–24 months after 2005 for US. Second, an increase in real interest rate results in higher unemployment at the 16–32-month scale before 1974 for Japan and 8–64-month scale before 2000 for US. Third, the degree of integration between labour market and energy market in US is higher than that in Japan. This study provides time-frequency evidence to the supply side hypothesis about the relationships between input prices and unemployment.     

Women's unemployment during transition Evidence from Czech and Slovak micro-data

We analyse women’s weekly probabilities of leaving unemployment in the Czech and Slovak Republics (CR and SR) in order to investigate three questions: 1) Why are unemployment rates much lower in the CR than the SR?; 2) Does the unemployment compensation scheme (UCS) substantially lengthen unemploy-mentspells?; and 3) Why are women’s unemployment rates higher than men’s? We find that differences in the behaviour of the individuals, employers and institutions in the SR and CR (as measured by differences in coefficients) play a larger role in determining the CR’s shorter female unemployment spells than do differences in measured demand and demographic variables. The UCS has only a moderate effect on duration and its impact is greater in the CR. The differences between men’s and women’s spells (in each republic) are explained more by differences in coefficients than by differences in observed characteristics. JEL classification: C41, H53, J23, J64, O15, P2.     

The impact of unemployment on inequality and poverty in OECD countries

The purpose of this research is to examine the contribution of unemployment to income inequality and poverty in various OECD countries. These relationships have been explored using Luxembourg Income Study micro-data. Considerable differences across OECD countries are revealed through the use of within-household unemployment distributions. These differences help to explain most of the observed divergences in the relationship between unemployment and income distribution, in conjunction with the heterogeneous influence of social benefits on the economic position of the unemployed in these countries. A sub-group decomposition analysis corroborates the limited effect of unemployment on income distribution in most of the considered countries. However, it seems clear that the unemployed are among those with the highest risk of experiencing poverty.
JEL classification: D31, I32, J31.     

A strong hysteretic model of Okun’s Law: theory and a preliminary investigation

This paper presents a ‘strong hysteretic’ version of Okun’s Law, that is, a version of the law in which ‘history matters.’ In this version of the link between fluctuations in unemployment and growth, the most important past growth shock exerts an influence on the current unemployment rate. A theoretical framework is proposed in order to lay the foundations of this version of Okun’s Law. In this framework, the hysteresis property arises because a large number of heterogeneous firms discontinuously adjust their activity levels in response to fluctuations in the rate of growth. The foundations having been laid, a method for empirically testing our hysteretic Okun’s Law is presented. An algorithm permits construction of a hysteresis operator, which synthesizes, for every moment, the growth shocks that have remained in the memory bank of the unemployment rate. Empirical tests are conducted to assess the empirical relevance of this version of Okun’s Law, as compared to the more familiar linear relationship. Empirical results consistent with hysteresis are found for several of the countries in our sample.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Age effects in Okun’s law with different indicators of unemployment

We reassess the results from the literature on the relationship between the youth unemployment rate and GDP growth (Okun’s law), based on the concern that the unemployment rate is not an ideal indicator for teenagers and young adults. Using the unemployment ratio instead, we find that youth unemployment (15–24 years old) is not significantly more responsive to economic growth than prime-age (25–64) unemployment. However, compared to prime-age unemployment, teenagers’ unemployment (15–19) is relatively unresponsive, whereas young adult’s (20–24) unemployment is more strongly correlated with economic growth. These results are quite different than those obtained with the unemployment rate as the dependent variable.     

Economic growth,structural change,and search unemployment

Economic growth is driven by structural change. Structural change does not come without a cost. The most evident social cost of structural change is high and persistent unemployment. This paper develops a model with an endogenously expanding service sector, where the constant flow of workers in and out of employment leads to structural unemployment. The main finding is that the level of unemployment is different between the initial period and the long-run equilibrium growth path, and that along the transition path, the level of unemployment will overshoot its equilibrium level, which can explain the long-run pattern of unemployment in most industrialized countries.      

Migration and labour markets in OECD countries: a panel cointegration approach

This article examines the interaction between immigration and the host labour market of 14 Organization for Economic Co-operation and Development (OECD) countries using nonstationary panel data methodology. We estimate a trivariate Vector Error Correction Model (VECM) and derive causality tests to simultaneously assess the long- and short-term macroeconomic impact of newcomers on wages and unemployment levels in the host country. The results suggest that an increase of migrants is likely to increase wages in the destination countries in the short run but to increase them in the long run. There is no evidence of adverse effects on unemployment due to immigration in short and long-term except for Anglo-Saxon countries in the short term. Our findings also show that immigration is conditioned by levels of unemployment and wages especially in Anglo-Saxon countries.     

Unemployment hysteresis - macro evidence from 16 OECD countries

This paper investigates empirically the presence ofunemployment hysteresis in 16 OECD countries, applying aggregate quarterly unemployment rates covering the past 25 years. Alternative test procedures are discussed and employed, posing both stationarity and hysteresis as null hypotheses. The results suggest that hysteresis effects are highly significant in Australia and Canada, and to a lesser extent also significant in most European countries and in Japan. Only in the USA, the presence of unemployment hysteresis is strongly and consistently rejected.Without attributing to them opinions or errors in the paper, I wish to thank Steinar Strøm, Ragnar Nymoen, Arvid Raknerud, Anders Rygh Swensen, Jeremy Smith and two referees for helpful comments.     

Excessive private sector leverage and its drivers: evidence from advanced economies

The paper provides novel quantitative assessments of the gaps between actual and sustainable levels of debt for households and corporates in selected advanced economies, revealing considerable heterogeneity across sectors and countries. The accumulation of gaps is found to precede financial distress. The paper also identifies key factors that drive excessive debt, separately for households and corporates. For households, excessive leverage is found to be higher in countries with lower interest rates and higher share of working population, but importantly also in countries with rising house prices and greater uncertainty as captured by unemployment. For corporates, debt overhang is estimated to be higher in countries with lower profitability, stronger insolvency frameworks and in absence of thin capitalization rules. There is therefore scope for the use of policy to limit the build-up of household and corporate debt overhang.