Estimating Europe’s natural rates

This article estimates potential output, the natural rate of unemployment, and the core inflation rate using aggregated euro area data. The empirical model consists of a Phillips curve linking inflation to unemployment. An Okun-type relationship is used to link the output gap to cyclical unemployment. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the natural rates and the corresponding gaps and (ii) structural breaks in the drift of potential output and the natural rate of unemployment.     

Unemployment flows,participation, and the natural rate of unemployment: Evidence from turkey

We use a parsimonious unobserved components model with flow rates to estimate a time-varying unemployment rate trend for Turkey. Our approach is grounded in the modern theory of labor market search. This trend estimate yields a level that the unemployment rate would converge to in the absence of cyclical shocks that move different flow rates away from their underlying trends. By the end of 2018, the unemployment rate trend for Turkey stood at 12 percent, gradually increasing since the end of the global recession. The key drivers of the unemployment rate trend have been rising separation and unemployment exit rate trends in the first decade of our sample period. Since 2012, these trends have stagnated somewhat, but the labor force participation rate has continued trending up.     

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

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.     

FINANCIAL RISK AND UNEMPLOYMENT

There is a strong correlation between corporate interest rates, their spreads relative to Treasuries, and the unemployment rate. We model how corporate interest rates affect equilibrium unemployment and vacancies, in a Diamond–Mortesen–Pissarides search and matching model. Our simple model permits the exploration of U.S. business cycle statistics through the lens of financial shocks. We calibrate the model using U.S. data without targeting business cycle statistics. Volatility in the corporate interest rate can explain a quantitatively meaningful portion of the labor market. Data on corporate firms support the hypothesis that firms facing more volatile financial conditions have more volatile employment.     

Employment, wages, and the economic cycle: Differences between immigrants and natives

In this paper, we analyse differences in the cyclical pattern of employment and wages of immigrants and natives for two large immigrant receiving countries, Germany and the UK. We show that, despite large differences in their immigrant populations, there are similar and significant differences in cyclical responses between immigrants and natives in both countries, even conditional on education, age, and location. We decompose changes in outcomes into a secular trend and a business cycle component. We find significantly larger unemployment responses to economic shocks for low-skilled workers relative to high-skilled workers and for immigrants relative to natives within the same skill group. There is little evidence for differential wage responses to economic shocks. We offer three explanations for these findings: an equilibrium search model, where immigrants experience higher job separation rates, a model of dual labour markets, and differences in the complementarity of immigrants and natives to capital.     

Natural and cyclical unemployment: A stochastic frontier decomposition and economic policy implications

This work splits effective unemployment into two components: natural unemployment, and cyclical unemployment. For that purpose, an estimation of the stochastic cost frontier is performed. The study is focused on the 17 autonomous communities in Spain over the period 1982–2012. Results evidence greater importance of the natural component as the principal determinant of effective unemployment. When comparing these results with those obtained applying univariate filters, the distribution in the components of the effective unemployment changes, increasing the importance of cyclical unemployment. This result indicates that the policymakers should have a greater power to implement aggregate demand policies.     

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.     

Hysteresis versus natural rate in Taiwan's unemployment: Evidence from the educational attainment categories

This study examines the hysteresis hypothesis in unemployment for Taiwan's educational attainment categories. Both nonlinear dynamics and structural breaks in unemployment are applied in our examinations. The empirical results without structural changes show that the unemployment hysteresis hypothesis cannot be rejected in all educational attainment categories. After simultaneously incorporating nonlinear processes and smooth structural changes, we find that only the unemployment rate of junior college graduates reveals a mean reverting to the natural rate in the long-run, whereas all other series still support the hysteresis hypothesis. The results indicate that: i) the shocks have only temporary effects on the unemployment rate of the junior college graduates; ii) the labor or macroeconomic stabilization policies could have long lasting effects on unemployment rates of the other educational attainment categories; iii) the unemployment rates of low-skill labor are susceptible to the changes of economic or fiscal policies; and iv) practical and occupational training mechanisms should be implemented and strengthened in the higher education system to alleviate the increasingly serious problem of unemployment.     

The dynamics of entrepreneurship: hysteresis, business cycles and government policy

This article estimates two unobserved components models to explore the macrodynamics of entrepreneurship in Spain and the USA. We ask whether entrepreneurship exhibits hysteresis, defined as a macrodynamic structure in which the cyclical component of entrepreneurship has persistent effects on the natural rate of entrepreneurship. We find evidence of hysteresis in Spain, but not the USA, while in Spain business cycle output variations significantly affect future rates of entrepreneurship. The article discusses implications of the findings for the design of entrepreneurship policies.     

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.     

BUSINESS CYCLES IN THE EQUILIBRIUM MODEL OF LABOR MARKET SEARCH AND SELF‐INSURANCE*

I introduce risk‐aversion, labor‐leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model’s cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor‐leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies.     

Trend shocks and the countercyclical U.S. current account

From 1960 to 2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that shocks to the trend growth rate of productivity can help explain the countercyclical U.S. current account. Our framework is a two‐country, two‐good business cycle model in which international asset trade is limited to a single, non‐contingent bond. We identify trend and transitory shocks to U.S. productivity using generalized method of moments (GMM) estimation. The specification that best matches the data assigns a large role to trend shocks. The estimated model also captures key facts regarding international co‐movement.     

NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff

Meaningful estimates of the non‐accelerating inflation rate of unemployment (NAIRU) within a Phillips curve framework require an identified tradeoff between inflation and unemployment. However, observations of inflation and unemployment are equilibrium points giving rise to a simultaneity problem. We assess conventional identifying assumptions in the literature on the German NAIRU in a general bi‐variate equations system of inflation and unemplyoment. We use a data‐driven method for identification based on shifts in the relative volatility of shocks to unemployment and inflation to identify the tradeoff for Germany. Our results support models which estimate a contemporaneous effect of unemployment on inflation and those which model inflation and unemployment jointly.     

Cyclical output,cyclical unemployment,and Okun's coefficient A structural time series approach

Okun's coefficient is estimated from U.S. quarterly data covering the period 1947:1–1992:2. The cyclical components of unemployment and output are extracted by smoothing using the Kalman filter as applied to Harvey's structural time series model. The estimated Okun's coefficient is around −0.38 irrespective of the whether the model used is static or dynamic and irrespective of the lag length in the dynamic model.     

Vicious and virtuous circles — The political economy of unemployment in interwar UK and USA

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment for the UK and the US interwar period. The theory here sees the natural rate and the associated path of unemployment as a reaction to mainly demand shocks and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.     

Volatility in productivity and the impact on unemployment

Volatility, and the uncertainty it creates, has long been recognized as a factor in economic decision making. Since hiring occurs before shocks to productivity are realized, firms’ investment in new labour is inherently risky. How large a role uncertainty in productivity has on aggregate unemployment is an empirical question that we attempt to answer. In this paper we measure the impact of higher volatility in labour productivity on the unemployment rate in the U.S. economy using a SVAR-GARCH-M model. Using the conditional standard deviation of productivity innovations from a multivariate GARCH model to measure uncertainty, we provide compelling evidence that unemployment increases with volatility. This estimated relative effect is actually larger for positive productivity shocks leading to unemployment declines only 60% as large as would have occurred using models that exclude uncertainty.     

The Effect of Hysteresis on Fluctuations in Unemployment and Inflation when Inflation Expectations are Adaptive

The recent level of unemployment may affect the natural rate of unemployment. The implications of such an hysteresis effect for macroeconomic fluctuations is analyzed using a stochastic dynamic model. The greater the importance of an hysteresis effect, the more pronounced are fluctuations in unemployment and inflation. Complete hysteresis causes the economy to be unstable.     

Deriving natural rates of unemployment for sub-national regions: the case of Canadian provinces

In order to pursue informed stabilization policies, it is vital for policy-markers to have estimates of how much of the total unemployment rate can be classified as cyclical rather than natural unemployment. This paper describes a method for generating regional natural-rate estimates and applies this method to the case of Canadian provinces. Results indicate that unemployment insurance generosity and relative minimum wages play an important role in determining natural unemployment rates in Canadian provinces. One of the enduring characteristics of the Canadian labour market has been substantial and peresistent unemployment rate disparities across provinces. The results of this study indicate that these disparities are primarily explained by differences in provincial values of structural variables such as unemployment generosity and by differences in provincial sensitivities to these structural variables. A furher result is that variation in cyclical unemployment rates is substantially less in the traditionally high unemployment region of Atlantic Canada than it is in the traditionally low unemployment province of Ontario. This result implies that the most appropriate policies to reduce unemployment in Atlantic Canada are not regionally-applied expenditure policies but rather policies designed to reduce structural distortions in the provincial labour markets.     

The efficacy and cost of regime shifts in inflation policies-Evidence from New Zealand and Sweden

In this paper a comparative study of the regime shift in inflation policies in New Zealand and Sweden is performed. A nonparametric regression method is used to decompose the inflation time series into three components of variation: a long-term trend, a medium-term (cyclical and transient variations) trend and a short-term shocks component. This allows study of the transition process from the high inflation characterizing the end of the 1970s and the 1980s to the low inflation observed during the 1990s. It is found that in New Zealand, although it is initially delayed, the decrease in inflation happens at a faster pace than in Sweden. This may indicate that reforms were more efficient in New Zealand. A clear link is also shown between the rising unemployment and the transition from high to low inflation. Furthermore, while in New Zealand a downward adjustment of the unemployment rate happens directly after the transition period, in Sweden there seems to be persistence in high unemployment.