Can oil shocks explain asymmetries in the US Business Cycle?

We consider whether oil prices can account for business cycle asymmetries. We test for asymmetries based on the Markov switching autoregressive model popularized by Hamilton (1989), using the tests devised by Clements and Krolzig (2000). We find evidence against the conventional wisdom that recessions are more violent than expansions: while some part of the downturn in economic activity that characterises recessionary periods can be attributed to dramatic changes in the price of oil, post-War US economic growth is characterized by the steepness of expansions. First Version Received: December 2000/Final Version Received: September 2001     

A Markov–switching vector equilibrium correction model of the UK labour market

There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. In this paper we present a statistical model that offers a congruent representation of part of the UK labour market since the mid 1960s. We use a cointegrated vector autoregressive Markov-switching model in which some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component. The long run dynamics are characterized by one cointegrating vector relating unemployment to trend-adjusted real wages and output. Despite there having been many changes affecting this sector of the UK economy, the Markov-switching vector-equilibrium-correction model with three regimes (representing recession, normal growth, and high growth) provides a good characterization of the sample data, and performs well relative to alternative linear and non-linear models. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established, and demonstrate the advantages of generating regime dependent responses. First Version Received: December 2000/Final Version Received: August 2001     

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.     

Seasonality and Markov switching in an unobserved component time series model

It is generally acknowledged that the growth rate of output, the seasonal pattern, and the business cycle are best estimated simultaneously. To achieve this, we develop an unobserved component time series model for seasonally unadjusted US GDP. Our model incorporates a Markov switching regime to produce periods of expansion and recession, both of which are characterized by different underlying growth rates. Although both growth rates are time-varying, they are assumed to be cointegrated. The analysis is Bayesian, which fully accounts for all sources of uncertainty. Comparison with results from a similar model for seasonally adjusted data indicates that the seasonal adjustment of the data significantly alters several aspects of the full model. First Version Received: January 2001/Final Version Received: February 2002 Send offprint requests to: Rob Luginbuhl?Correspondence to: Rob Luginbuhl     

The cause of Danish unemployment: Demand or supply shocks?

We study the Danish unemployment experience 1905–92 using a common trends model with cointegration constraints. To justify the identifying assumptions about the cointegration vectors and the common trends we present a simple macroeconomic model of the labor market. The model determines the long run behavior of labor productivity, employment, unemployment, real product and real consumer wages. The empirical results give support for three cointegration relations and two common trends. Based on the economic model the trends are interpreted as representing labor productivity (technology) and labor supply. With unemployment being nonstationary, the common trends analysis indicates that labor supply shocks is the primary source for explaining the behavior of unemployment. First Version Received: August 1999/Final Version Received: June 2000     

Downward Nominal Rigidity in West German Earnings, 1975–95

If downward nominal wage rigidity exists, it should affect the distribution of earnings changes. We present a common analytical framework for three distinct and previously unconnected approaches to the analysis of downward nominal rigidity, the skewness–location approach, the symmetry approach and the histogram–location approach. We modify them by dropping the assumption of time-invariant rigidity and apply them to earnings data from the IAB-Beschftigtenstichprobe (IABS). We find that the distribution of West German log earnings changes is indeed affected by downward nominal rigidity. Our modification of the approaches also allows us to find that the degree of nominal rigidity depends on business cycle conditions, with weaker rigidity in times of rising unemployment. Our findings support the critics of very low inflation targets.     

Unemployment,marriage and divorce

In this article, we examine whether the business cycle plays a role in marriage and divorce. We use data on Spain, since the differences between recession and expansion periods across regions are quite pronounced in that country. We find that the unemployment rate is negatively associated with the marriage rate, pointing to a pro-cyclical evolution of marriage; however, the response of the divorce rate to the business cycle is mixed. Results show the existence of different patterns, depending on geography: divorce rates in coastal regions are pro-cyclical, while in inland regions divorces react to unemployment in a counter-cyclical way.     

Unemployment insurance and the business cycle*

An equilibrium model is developed to study the interaction of the business cycle, unemployment insurance (UI), and the labor market for young men in Canada. The model combines optimal job offer, layoff, and recall decisions within a numerically solved and restricted Bayesian–Nash equilibrium. We consider the long‐run implications of changes made to unemployment insurance in Canada during the 1990s. The changes lead to equilibrium increases in average rates of unemployment, layoffs, and recalls. Eliminating UI lowers the equilibrium unemployment rate and average observed earnings. UI policy affects the timing of cycles of endogenous outcomes relative to the productivity cycle.     

THE CYCLICALITY OF SEPARATION AND JOB FINDING RATES*

This article uses CPS gross flow data to analyze the business cycle dynamics of separation and job finding rates and quantify their contributions to overall unemployment variability. Cyclical changes in the separation rate are negatively correlated with changes in productivity and move contemporaneously with them, whereas the job finding rate is positively correlated with and tends to lag productivity. Contemporaneous fluctuations in the separation rate explain between 40 and 50% of fluctuations in unemployment, depending on how the data are detrended. This figure becomes larger when dynamic interactions between the separation and job finding rates are considered.     

A regime-switching approach to the study of speculative attacks: A focus on EMS crises

This paper implements a regime-switching framework to study speculative attacks against EMS currencies during 1979–1993. To identify speculative episodes, we model exchange rates, reserves, and interest rates as time series subject to discrete regime shifts between two possible states: “tranquil” and “speculative”. We allow the probabilities of switching between states to be a function of fundamentals and expectations. The regime-switching framework improves the ability to identify speculative attacks vis-à-vis the indices of speculative pressure used in the literature. The results also indicate that fundamentals (particularly budget deficits) and expectations drive the probability of switching to a speculative state. First Version Received: October 2000/Final Version Received: June 2001     

Crime during the business cycle: urban–rural differences

Despite the abundant literature on how crime evolves over the business cycle, no consensus has arisen whether crime increases or decreases during recessions. The literature provides both positive and negative associations between the crime rate and the unemployment rate, a commonly used proxy for the business cycle. This study revisits this issue and uses county-level data from 1990 to 2013. It allows for differences as to how unemployment relates to both property crime and violent crime depending on the size of the counties. We find evidence of a positive association between unemployment and property crime that strengthens with county size. The results show the same pattern for violent crime but are statistically weaker. Our findings suggest that the positive association between property crime and unemployment that others have found is largely driven by more populous areas.     

A Time Series Analysis of the Relationship between Inflation Uncertainty and Unemployment

This paper examines the empirical relationship between inflation uncertainty and unemployment rates. We find supportive evidence of a significant positive association between inflation uncertainty and unemployment, but this relationship depends critically on three factors. First, the inflation uncertainty-unemployment relationship is not significant before the mid-1970s. Second, the inflation uncertainty-unemployment relationship does not hold across all single digit SIC industries. And third, the inflation uncertainty-unemployment relationship is concentrated at business cycle and long-run components of the data, rather than high-frequency components.     

Re-employment probabilities over the business cycle

Using a Cox proportional hazard model that allows for a flexible time dependence in order to incorporate business cycle effects, we analyze the determinants of re-employment probabilities of young workers in the USA from 1978–1989. We find considerable changes in the chances of young workers finding jobs over the business cycle despite the fact that personal characteristics of those starting jobless spells do not vary much over time. Therefore, government programs that target specific demographic groups may change individuals’ positions within the queue of job seekers, but may only have a more limited impact on average re-employment probabilities. Living in an area with high local unemployment reduces re-employment chances as does being in a long spell of non-employment. However, the damage associated with being in a long spell seems to be reduced somewhat if a worker is unemployed in an area with high overall unemployment.

Evidence of the added-worker and discouraged-worker effects in Australia

Gross flow data for workers moving between the states of employment, unemployment and non-participation in Australia can be used to analyse the likelihood of workers transitioning between the three states in different phases of the business cycle. We use correlation analysis and a SVAR model to determine the cyclicality of state transition rates and use these results to characterise labour force inflows and outflows as being consistent in aggregate with either the discouraged-worker effect (DWE) or the added-worker effect (AWE). We find evidence that the AWE is dominant in transitions in both directions between unemployment and non-participation which contributes to a rise in unemployment during economic contractions. We also find that the DWE is dominant in transitions from non-participation to employment and that this drives the overall result that non-participation rises during a contraction. This means that the overall participation rate is procyclical. It is important to understand the cyclical influences on labour force participation and its interaction with unemployment before framing policy responses which seek to reduce labour market slack.     

Common factors in Latin America's business cycles

We develop a common factor approach to reconstruct new business cycle indices for Argentina, Brazil, Chile, and Mexico (“LAC-4”) from a new dataset spanning 135 years. We establish the robustness of our indices through extensive testing and use them to explore business cycle properties in LAC-4 across outward- and inward-looking policy regimes. We find that output persistence in LAC-4 has been consistently high across regimes, whereas volatility has been markedly time-varying but without displaying a clear-cut relationship with openness. We also find a sizeable common regional factor driven by output and interest rates in advanced countries, including during inward-looking regimes.     

The Robertson connection between the natural rates of interest and unemployment

The paper explores the connection between the natural rates of unemployment and interest first put forward in the literature by Dennis Robertson in the 1930s. This looks at monetary dynamics in the business cycle and assesses the Robertsonian contribution to developments in macroeconomics before and after Keynes's General Theory. Robertson showed how unanticipated price level changes affect supply and demand in the labour market, as well as the saving–investment process in the credit market. Robertson's approach to economic policy was that of getting the relations right between cyclical changes in prices, output and employment and their long-run equilibrium values over time.     

A comparison of unemployment, income and mortality interaction for five European countries

The relationship between unemployment and health status is examined in a comparative study of five European countries using a time series model. "The hypothesis considered in this paper is that the secular decline in mortality rates can be attributed to the secular rise in real per capita income and that the remaining fluctuations in mortality rates can be explained by cyclical movements in income and variations in unemployment." The data concern the Federal Republic of Germany, France, Italy, Sweden, and Ireland.     

Wage,productivity and unemployment: microeconomics theory and macroeconomics data

We confront microeconomics theory with macroeconomics data. Unemployment results from two main micro-level decisions of workers and firms. Most of the efficiency wage and bargaining theories predict that over the business cycle, unemployment falls below its natural rate when the worker’s real wage exceeds the reservation wage. However, these theories have weak empirical support. Firm’s decision predicts that when the worker’s real wage exceeds the marginal product of labour (MPL), unemployment increases above its natural rate. Accounting for this microeconomic decision helps explain almost all the fluctuations of US unemployment.     

Employed unemployed? On shadow employment in transition

Unregistered employment poses two types of challenges to the researchers: (1) reliably evaluating the wage differential between formally and informally employed and (2) accounting for the push and pull factors in general and the effects of business cycle in particular. We address the former with the use of propensity score matching and analyse the evolution of the estimated average compensations and the differentials with reference to GDP and unemployment fluctuations. Using 13 years of quarterly labour force survey data from Poland of de iure unemployed but de facto employed individuals we find, that in-the-shadow compensations tend to be higher and procyclical. We also find considerable distributional heterogeneity.