Unemployment Responses to 'Skill-biased' Technology Shocks: the Role of Labour Market Policy

Do skill-biased shocks that increase the spread of labour productivities, interacting with different policy regimes, explain the rise in unemployment in Europe relative to the United States in the 1980s and 1990s? The hypothesis is an implication of a version of the Mortensen and Pissarides (1994) model of equilibrium unemployment which allows for worker heterogeneity. A calibrated version of the model implies that a similar unemployment increase would have occurred in the United States over this period, given changes in relative productivity by education implied by observed wage changes, had unemployment compensation and employment protection policies been at European levels.     

Egalitarian wage policies, unemployment and skill-biased technological change

A popular explanation for the rise in European unemployment during the past decades is that relative wages failed to adjust to changes in relative productivities. Many economists reject this hypothesis on the ground that the ratios of low- to high-skill unemployment did not increase. Building on a search model, I argue that relative unemployment rates are affected by skill-neutral, as well as skill-biased shocks; hence stable ratios are theoretically consistent with a mix of skill-biased and skill-neutral shocks. Yet, numerical exercises confirm that wage rigidity in the face of skill-biased shocks probably did not explain much of the European unemployment experience.     

Policy Influences on Unemployment: the European Experience

This paper considers the implications of four kinds of labour market policies for the 1980s rise in European unemployment: unemployment compensation, active labour market policies, employment protection legislation and taxation. It finds evidence that all have played a role in the determination of unemployment and discusses the mechanisms involved, the extent of the influence of each and the lessons learned from this experience. One of the main findings is that there is a trade‐off between wage inequality and unemployment. Policy has played a role in determining how a country responded to the negative macroeconomic shocks of the 1980s but policy alone cannot explain the full rise in European unemployment and North American wage inequality.     

Can labour market institutions explain high unemployment rates in the new EU member states?

This article studies the question whether labour market institutions can explain the large differences in unemployment rates in the new member states. It investigates several labour market institutions and concludes that they are on average no more rigid in the new member states than in the old ones. However, there is a lot of heterogeneity both in terms of institutions and unemployment rates. The impact of labour market institutions on performance is empirically examined for a panel of European countries. These results are used to assess to what extent labour market institutions are responsible for the diverse unemployment experiences in the new member states. Labour market institutions can explain only a small part of these differences. Other causes of unemployment seem to be more important.

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.     

Quarterly US unemployment: Cycles,seasons and asymmetries

This paper documents three stylized facts for the quarterly unemployment rate in the United States. Firstly, unemployment is asymmetric over the business cycle, i.e. it rises sharply in recessions and it falls slowly in expansions. Secondly, its seasonal fluctuations are not constant across the two business cycle stages in the sense that there is less seasonality in recession periods. Thirdly, the effect of shocks to the unemployment rate in expansions seem transitory, while this effect is permanent in recessions. Some implications of these stylized facts for empirical macroeconomics and seasonal adjustment are discussed.     

Labour market institutions and wage setting: evidence for OECD countries

The main channel through which labour market institutions are supposed to work in affecting unemployment is through their effects on the key parameters of the wage curve. In particular, labour market institutions may have both a direct wage push (or level) effect, i.e. change the level of the real wage for any given level of the unemployment rate and productivity, and an indirect slope effect, i.e. change the responsiveness of the real wage to the unemployment rate. The question this article addresses is whether there is any evidence that these transmission mechanisms were at work in a group of 20 Organization for Economic Co-operation and Development (OECD) countries over the period 1960 to 1999. The analysis is accomplished in two steps. Pooled Mean Group (PMG) estimates of a wage equation including unemployment, productivity and a set of wage push institutions are first obtained, allowing only a subset of institutional coefficient to be homogeneous, while leaving the unemployment and other coefficients free to differ across countries. The country specific estimates of the unemployment coefficients are then used to investigate whether and to what extent cross-country heterogeneity in the estimated wage response to unemployment is related to institutional differences. The results support the existence of significant wage push effects of union density and benefit replacement rates, and of significant slope effects of benefit replacement rates, benefit duration and employment protection. A more generous unemployment benefit structure is found to lower the wage responsiveness to unemployment, while higher employment protection, contrary to what one expects, is found to enhance it. No significant level and slope effects are found for the tax wedge and bargaining coordination.     

European unemployment revisited: Shocks,institutions, integration

This paper painstakingly restores a vintage empirical model that relates unemployment to shocks and institutions, and proceeds to run it on recent data featuring dramatic shocks and controversial institutional change. The original specification fails to fit these data. Theoretical insights and the results of suitably modified regressions suggest that the capital flow and reforms implications of international economic integration are crucial for interpreting twists and turns of unemployment rates in Europe and elsewhere.     

On the relative importance of demand and supply shocks: a panel VAR study for US states

This article is a panel VAR study of demand and supply shocks in the USA using state-level data where structural shocks are decomposed into state idiosyncratic and common components. Decomposition suggests that in all instances, idiosyncratic state shocks rather than common shocks have larger impact and explain most variation in both the state-level unemployment rate and real gross state product. Further, demand shocks are the primary driving force in unemployment rate fluctuations, while both demand and supply are important in output movements to varying degree of impact and importance depending on the use of quarterly or annual data.     

The asian financial crisis and the natural rate of unemployment: Estimates from a structural var for the newly industrializing economies of asia

Abstract. We use a structural vector autoregressive model to estimate the natural rate of unemployment for Hong Kong, Korea, Singapore and Taiwan for the period 1982–2000. Our results show that the dramatic rise in the unemployment rate observed in Hong Kong and Korea was mainly the result of demand shocks rather than structural changes, while in Singapore the unemployment rate rise reflected almost entirely a rise in the natural rate. Taiwan's natural rate has been relatively stable. We offer explanations for these different results in terms of the different economic characteristics (particularly labor market features) of the four countries.     

The role of real and monetary shocks in explaining business cycle fluctuations

The essay brings empirical evidence to bear on the ability of real and monetary shocks to explain busines cycles. Using vector autoregressive techniques it is found that both real and monetary shocks are able to explain substantial portions of the innovations in output and unemployment.     

WELFARE MEASUREMENT,INVOLUNTARY UNEMPLOYMENT,AND HETEROGENEITY

This paper concerns welfare measurement in an economy with union wage setting, where the equilibrium is characterized by unemployment. Contrary to results derived in the first best, the current value Hamiltonian is not an exact welfare measure in an economy with unemployment. Instead, the welfare measure also depends on “employment effect,” which are caused by the discrepancy between supply and demand in the labor market. In addition, since unemployment gives rise to heterogeneity, distributional effects will also characterize the welfare measure.     

Regional unemployment and human capital in transition economies1

Differences in regional unemployment in post‐communist economies are large and persistent. We show that within‐country regional variation in inherited human capital in four such economies explains the bulk of regional variation in unemployment; we explore potential explanations. Our evidence suggests that internal skill‐biased migration and the flow of foreign direct investment are not working as adjustment mechanisms but rather help explain the lack of convergence in regional unemployment rates. Although this capital and labour mobility pattern is consistent with the presence of regional skill spillovers, we find little support for this hypothesis. Instead, the observed migration pattern appears to arise from different skill‐specific adjustments to regional shocks brought about in part by labour‐market institutions such as guaranteed welfare income.     

Labour market institutions and unemployment: an international panel data analysis

This paper deals with the effects of labour market institutions on unemployment in a panel of 19 OECD countries for the period 1960–2000. In contrast to many other studies, we use long time series and analyse cyclically adjusted trend values of the unemployment rate. Our novel contribution is the estimation of panel models where we allow for heterogeneous effects of institutions on unemployment. Our main results are, first, that on the average tighter employment protection, a higher tax burden on labour income and a more generous unemployment insurance system increase, whereas a higher centralization of wage negotiations decreases unemployment, and secondly, that the magnitude of the effects of institutions differs considerably between countries.     

TECHNOLOGICAL LEARNING AND LABOR MARKET DYNAMICS

The search‐and‐matching model of the labor market fails to match two important business cycle facts: (i) a high volatility of unemployment relative to labor productivity, and (ii) a mild correlation between these two variables. We address these shortcomings by focusing on technological learning‐by‐doing: the notion that it takes workers' time using a technology before reaching their full productive potential with it. We consider a novel source of business cycles, namely, fluctuations in the speed of technological learning, and show that a search‐and‐matching model featuring such shocks can account for both facts. Moreover, our model provides a new interpretation of recently discussed “news shocks.”     

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.     

Migration and imperfect labor markets: Theory and cross-country evidence from Denmark,Germany and the UK

We investigate the labor market effects of immigration in Denmark, Germany and the UK, three countries which are characterized by considerable differences in labor market institutions and welfare states. Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labor supply shocks, and, hence, the labor market effects of immigration. We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly. We find that the wage and employment effects of immigration depend on wage flexibility and the composition of the labor supply shock. In Germany immigration involves only moderate wage, but large unemployment effects, since immigrants are concentrated in labor market segments with low wage flexibility. The reverse is true for the UK and Denmark.     

Technology–Policy Interaction in Frictional Labour-Markets

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology–policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.     

Testing for hysteresis in unemployment an unobserved components approach

We suggest a new test for hysteresis in unemployment based on an unobserved components model. Observed unemployment rates are decomposed into a natural rate component and a cyclical component. The impact of lagged cyclical shocks on the current natural component is the measure of hysteresis. To identify the two components of unemployment, we assume that the cyclical compoentn is correlated with capacity utilization. The model is applied to U.S. and German data. We find no evidence of hysteresis in U.S. data. German unemployment rates exhibit substantial hysteresis. A shock of 1.0 percent to the current cyclical component permanently increases future German natural rates by about 0.5 percent. For both countries, natural rate shocks turn out to be an important impulse mechanism to explain movements in observed unemployment rates.     

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.