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What determines unemployment in the long run? Band spectrum regression on ten countries 1913–2016

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  • Hegelund, Erik
  • Taalbi, Josef

Abstract

The rise in unemployment since the 1980s has been predominantly understood as driven by short-term shocks, or long-run conditions in the form of rigid labor market institutions or ‘jobless growth’, mostly based on studies on the period from 1960 onward. Aggregate demand is usually assumed to have no long-run impact on unemployment, but recent contributions call this into question. This paper adopts a long-run view of macroeconomic history to explore the long-run relationship between unemployment and macroeconomic variables. We use wavelet analysis to decompose time series covering ten countries 1913–2016, into short-run, medium-run, and long-run variations, and band spectrum regressions on the relation between unemployment, GDP, investment, interest rates and productivity. Through estimations of cross-country regression models, we find strong indications that unemployment correlates negatively with the long-run components of investment. Taking potential structural breaks into consideration in each of the ten countries and ignoring other variables, our results indicate that short- to long-run components of capital formation explain between 40 percent and 81 percent of variations in unemployment. Our results support the view that economic models of long-run unemployment and labor market policy should take long-run conditions for investment into account.

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  • Hegelund, Erik & Taalbi, Josef, 2023. "What determines unemployment in the long run? Band spectrum regression on ten countries 1913–2016," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 144-167.
    • Handle: RePEc:eee:streco:v:64:y:2023:i:c:p:144-167
    DOI: 10.1016/j.strueco.2022.11.009
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