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Global Shocks and Unemployment Adjustment

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  • Ron Smith
  • Gylfi Zoega

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 shocks and the speed of convergence to equilibrium also change over time as domestic labour market institutions change. The calculation of the Principal Components is suggestive of the possible economic causes of long swings in unemployment.

Suggested Citation

  • Ron Smith & Gylfi Zoega, 2004. "Global Shocks and Unemployment Adjustment," DEGIT Conference Papers c009_003, DEGIT, Dynamics, Economic Growth, and International Trade.
    • Handle: RePEc:deg:conpap:c009_003
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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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    More about this item

    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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