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Global Shocks and Unemployment Adjustment

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  • Ron Smith
  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

The literature on unemployment dynamics is mainly concerned with the nature and impact of shocks to unemployment. In this paper we use OECD unemployment data to infer the nature of these shocks using factor analysis. We find that two Principal Components can account for a large part of the variance of unemployment between and within countries. We then use regression analysis in which equilibrium unemployment depends on a global shock and domestic labour market institutions, and the institutions also determine the response to global shocks and the speed of convergence to equilibrium. We find that national unemployment series do converge to a moving equilibrium and that the responsiveness of shocks and the speed of convergence to equilibrium also change over time as domestic labour market institutions change. The calculation of the Principal Component is suggestive of the possible economic causes of long swings in unemployment.

Suggested Citation

  • Ron Smith & Gylfi Zoega, 2004. "Global Shocks and Unemployment Adjustment," Birkbeck Working Papers in Economics and Finance 0401, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0401
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    Cited by:

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    2. Christian Dreger & Hans-Eggert Reimers, 2009. "Hysteresis in the development of unemployment: the EU and US experience," Spanish Economic Review, Springer;Spanish Economic Association, vol. 11(4), pages 267-276, December.

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    Keywords

    unemployment dynamics; principal components; labour market institutions;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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