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Labour at risk

Author

Listed:
  • Botelho, Vasco
  • Foroni, Claudia
  • Renzetti, Andrea

Abstract

We propose a Bayesian VAR model with stochastic volatility and time varying skewness to estimate the degree of labour at risk in the euro area and in the United States. We model the asymmetry of the shocks to changes in the unemployment rate as a function of real activity and financial risk factors. We find that the conditional distribution of the changes in the unemployment rate displays time-varying volatility and skewness, with peaks coinciding with the Global Financial Crisis and the COVID-19 pandemic, in both areas. We also take advantage of the multivariate nature of our parametric model to measure the joint risk of large increases in the unemployment rate together with large annual rates of inflation, a proxy for “stagflation” risks. The model captures an increase of the risk of stagflation with the surge in inflation that followed the recent energy crisis in 2022. Nevertheless, stagflation risks were contained by the resilient performance of the labour market in both areas. Labour at risk is therefore important for the assessment of the inflation-unemployment trade-off.

Suggested Citation

  • Botelho, Vasco & Foroni, Claudia & Renzetti, Andrea, 2024. "Labour at risk," European Economic Review, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:eecrev:v:170:y:2024:i:c:s0014292124001788
    DOI: 10.1016/j.euroecorev.2024.104849
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    More about this item

    Keywords

    Unemployment risk; Stagflation risk; Labour market; Bayesian econometrics;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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