Uncertainty and employment dynamics in the euro area and the US

In this paper we investigate the local and foreign effects of uncertainty shocks on unemployment in two large economic regions, the United States (US) and the euro area (EA). We deploy a Bayesian Markov-switching structural vector autoregressive model identified via heteroscedasticity. Two alternative specifications are considered with the shocks of interest being labelled as “US (or EA) demand uncertainty” and “US (or EA) financial market uncertainty”. We reach similar conclusions using both specifications: (i) US shocks have an effect on both the local and foreign labour markets while euro area shocks are much less influential; (ii) the US labour market tends to react and absorb shocks more quickly than the labour market in the euro area does. As economic theory predicts, the reaction to uncertainty shocks points to possible market imperfections that are region specific.