Unemployment across the Euro Area: The Role of Shocks and Labor Market Institutions — Zhe Wang (Economics PhD seminar)

Abstract:

This paper analyses the impact of shocks and labor market institutions on unemployment across the Euro Area (EA) from 1999 to 2013. Specifically, I apply the empirical methodology of Blanchard and Wolfers (2000) and Nickell, Nunziata and Ochel (2005) to identify the direct effects of shocks and labor market institutions on unemployment, on the one hand, and the indirect effects of labor market institutions on changing the transmission of shocks to unemployment, on the other hand. The shocks consist of 1) total factor productivity (TFP) shocks, 2) the real long-term interest rate, 3) labor demand shocks, 4) ECB money supply shocks and 5) ECB unsystematic monetary policy shocks. The labor market institutions cover the unemployment benefit system, active labor market policies (ALMPs), employment protection laws (EPLs), the system of wage determination and the labor tax wedge. The results suggest that the real interest rate and labor demand shocks significantly affect the unemployment rate in the EA. As for labor market institutions, EPLs play a favorable role in reducing unemployment. In contrast, a higher tax wedge tends to have an adverse effect on unemployment, not only directly increasing unemployment but also indirectly amplifying the effects of shocks on unemployment.

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