Cyclical Asymmetries in Unemployment Rates: International Evidence

This paper investigates to what extent the observed nonlinearities in the unemployment rates of six major developed economies are the response to cyclical asymmetries. Two classes of models are compared: strict smooth transition autoregressions and models where the transition variable is GDP growth, which is considered a more direct indicator of the business cycle. The empirical evidence points out that nonlinearities in unemployment rates are induced by cyclical asymmetries. It is also found that in most countries the unemployment rate looks stationary and reverts to a long-run equilibrium rate in periods of normal growth, while in extreme cyclical situations it tends to become nonstationary as if each extreme cyclical episode had its own path of equilibrium.      

Worker heterogeneity and labor market volatility in matching models

Shimer demonstrated that aggregate productivity shocks in a standard matching model cause fluctuations in key labor market statistics—such as the job-finding rate, the vacancy/unemployment ratio, and the unemployment rate—that are too small by an order of magnitude [Shimer, R., 2005. The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1) 25–49]. This paper shows that when the standard model is extended to allow for worker heterogeneity, it exhibits considerably greater volatility. In the model, marginal workers, whose productivity only slightly exceeds the value of their alternative use of time, constitute a disproportionate share of unemployment on average, and that share rises when aggregate conditions deteriorate. These composition effects cause firms to open fewer vacancies during downturns.     

A Schumpeterian model of equilibrium unemployment and labor turnover

This paper constructs a general equilibrium model of equilibrium unemployment by combining an endogenous growth model with a variant of equilibrium search theory. The analysis offers two explanations for the causes of widening wage gap between skilled and less-skilled labor, and rising unemployment rate among the less skilled: technological change in the form of an increase in the size of innovations or skilled labor saving technological change in R&D activity. In addition, the model identifies two distinct effects of faster technological progress on the aggregate unemployment rate. First, it increases the rate of labor turnover and therefore increases the aggregate unemployment rate – the creative destruction effect. Second, it creates R&D jobs, which offer workers complete job security, and consequently reduces the aggregate unemployment rate – the resource reallocation effect.     

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 compensation and aggregate fluctuations

This paper focuses on a theoretical and empirical analysis of the effects of discretionary changes of unemployment compensation payments on aggregate fluctuations. By means of a dynamic stochastic general equilibrium model, it is shown that unemployment compensation can stabilize consumption on the one hand; however, on the other one, it has adverse effects on unemployment and output. These theoretical results are confirmed by the empirical structural vector autoregressive model. Moreover, the results highlight the importance of real wages in transmitting unemployment benefit shocks on to the macroeconomy. In particular, discretionary changes lead to an increase in real wages, unemployment and consumption while inducing a small decline in output.     

Union wage setting and unemployment in the Netherlands (1965–1987)

This paper presents an empirical model of union wage setting and employment. The (Stackelberg) equilibrium unemployment rate is shown to be a function of taxes, the replacement ratio, the gap between consumer and producer prices, productivity effects, and the rate of long-term unemployment. The model is estimated with aggregate data from the private sector in the Netherlands (1965–1987). The results suggest that the equilibrium unemployment rate is pushed upwards by taxes, the replacement ratio and by the gap between consumer and producer prices, and is reduced by productivity effects. Insider-outsider effects appear insignificant.     

Wage rigidities and unemployment fluctuations in a small open economy

This study analyzes the implications of the monetary policy for the unemployment rate in a small open economy. We introduce nominal wage rigidities and unemployment into the small open economy version of the dynamic stochastic general equilibrium model. We derive three main findings. First, under nominal wage rigidities, the cyclical properties of the calibrated model, in response to a productivity shock, are consistent with the empirical evidence on a decrease in employment and an increase in real wages. Second, for all the variables considered, the Taylor rule tracks the optimal policy better than the simple rule with unemployment as an argument. Third, regardless of the output or unemployment gap being targeted, it is not optimal that central banks respond to nominal exchange rate variations.     

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.     

Asymmetry in the business cycle: Evidence from the Australian labour market

Cyclical asymmetry has been recognised as a non-linear phenomenon in recent studies examining unemployment rate time series. The probalistic structure of such time series is different during upswings and downswings and models should reflect this change in structure by incorporating non-linearities to allow for the switching in optimising behaviours between the different phases. In this paper we use a number of established and new tests for identifying nonlinearities of different types as they occur in first-differenced time series of the seasonally-adjusted monthly Australian aggregate and regional unemployment rates. After identifying whether nonlinearity of a particular form is present in a given time series, the appropriate non-linear or linear model is fitted and the model analysed for cyclical behaviour.     

More on unemployment and vacancy fluctuations

Shimer [Shimer, R., 2005a. The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (March), 25–49] argues that the textbook equilibrium search model of unemployment explains less than 10% of the volatility in US vacancies and unemployment when fluctuations are driven by productivity shocks. His paper as well as other recent work inspired by it are reviewed and extended here. Although there seems to be excessive feedback from the job-finding rate to the wage built into the Nash bargaining mechanism assumed to determine wages in the model, we argue that he and others overemphasize the need for wage rigidity to explain the data on labor-market fluctuations. Indeed, a modified version of the model can explain the magnitude of the empirical relationship between the vacancy–unemployment ratio and labor productivity when wages are the outcome of a strategic bargaining game and when the elasticity of the matching function and the opportunity cost of a match are set at reasonable values. The modified model also explains almost two thirds of the volatility in the ratio relative to that of productivity when separation shocks are taken into account, as well as the strong negative correlation between vacancies and unemployment found in Shimer's data.     

Unemployment and interindustry labour mobility in Canada in the 1980s

The determinants of interindustry mobility of labour, and its relationship to the unemployment rate is examined, using micro-data on Canadian workers from 1980/81, 1982/83 and 1985/86. It contrasts the implications of the ‘dynamic reallocation’ model (Lilien, 1982) in which rising aggregate unemployment is due to in creased dispersion in the net hiring rates of firms (implying positive covariance of interindustry mobility and unemployment rates) with the older ‘Keynesian’ perspective that high unemployment ‘chills’ labour market mobility, implying a neative relationship. Qualified support is obtained for the ‘chilling’ model, as well as standard results on the role of job tenure, hours worked, etc. The general moral is the cyclical sensitivity of labour market behaviour, i.e. individuals appear to react to the aggregate unemployment rate.     

Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.     

Tax Incidence in a Model with Efficiency Wages and Unemployment

Abstract

The purpose of the present paper is to examine the effects of taxation on income distribution in a model with efficiency wages and involuntary unemployment. Central to our efficiency-wage model is the hypothesis that firms set wages above market-clearing levels, whenever the productivity of labor depends on the real wage paid by the firm, and unemployment. Within a two sector general equilibrium model we study the incidence of factor and commodity taxes on income distribution, and unemployment. Our findings differ substantially from those derived by the traditional neoclassical analysis, originally developed by Harberger, and as it has been extended by several authors.     

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.     

Endogenous, Efficient Long-Run Cyclical Unemployment, Endogenous Long-Run Growth, and Division of Labor

The paper uses a dynamic equilibrium model to explain the concurrence of economic growth and business cycles. Introducing durable goods into a model with ex-ante identical consumer–producers and economies of specialized learning-by-doing, the author shows that when job-shifting costs, economies of specialized learning-by-doing, and trading efficiency are sufficiently large, a dynamic equilibrium with business cycles and unemployment might be Pareto superior to noncyclical growth patterns. Long-run cyclical unemployment still exists when the credit market is imperfect. Extending the model into overlapping generations framework, the author shows that complete division of labor with business cycles would still occur in equilibrium.     

The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).     

The German Unemployment Compensation System: Effects On Aggregate Savings And Wealth Distribution

The effects of the German unemployment compensation system on aggregate savings and the distribution of wealth are studied in a general equilibrium 60–period OLG model. The distribution of wealth is derived as an endogenous function of the parameters characterizing the unemployment compensation system, which comprises unemployment insurance (Arbeitslosengeld), unemployment assistance (Arbeitslosenhilfe), and welfare payments (Sozialhilfe), the latter two being subject to a means test. As our main results: (i) both aggregate savings and wealth equality are a monotone decreasing function of unemployment benefits; (ii) optimal unemployment compensation declines over the spell of unemployment; (iii) asset–based means tests are shown to reduce welfare if the allowable wealth level is below the average wealth in the economy.     

Asymmetry in Okun's law

Abstract.  In this paper we support the proposition that the output‐unemployment relationship as represented by Okun's law is asymmetric. Okun's coefficients are defined based on a dynamic model that allows for asymmetry in the relationship between cyclical output and unemployment. Using data from the United States for the post‐war period, our results show that the short‐run effects of positive cyclical output on cyclical unemployment are quantitatively different from those of negative ones, and the data are consistent with the proposition that cyclical unemployment is more sensitive to negative than to positive cyclical output. Several theoretical explanations of asymmetry rationalize the findings. JEL Classification: C13, C22, E32     

A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

A Dynamic Stochastic Disequilibrium model is proposed for business cycle analysis. The core innovation and fundamental deviation from the corresponding full-employment Dynamic Stochastic General Equilibrium model is the assumption that the nominal wage is a policy variable with no tendency to clear the labor market. As a consequence, disequilibrium unemployment arises which crucially alters the transmission of macroeconomic shocks. Solving the puzzle of low fiscal multipliers in conventional general equilibrium models, the effects of spending shocks become considerably more pronounced in the disequilibrium model because idle labor can be quickly utilized to accommodate aggregate demand without requiring households to increase their supply. In contrast to the standard model, technology and labor supply shocks are partly absorbed by unemployment and, hence, only moderately expansionary. Despite its simplicity and unlike the corresponding general equilibrium model, the disequilibrium model is able to generate shock responses which are broadly in line with empirical evidence.     

The econometrics of rational partisan theory

This study develops an econometric intervention model representing the standard empirical approach to testing Alesina's (1987) Rational Partisan Theory implication that elections lead to short-term changes in output growth and unemployment., This intervention approach may be subject to two econometric difficulties., First, the cyclical nature of the autoregressive variables suggest the regression residuals may be serially correlated., Second, the election intervention variable may be endogenous to the cyclical variables., Empirical support for the model is mixed., Ordinary Least Squares estimates for both series produce a coefficient for the intervention variable which is of the predicted sign but not significant., The output growth regression results are robust to serial correlation and endogeneity concerns., For unemployment, controlling for serial correlation generates a significant coefficient, but adjusting for endogeneity does not.,