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

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  • Hegeland, Erik

    (Department of Economic History and International Relations, Stockholm University)

  • Taalbi, Josef

    (Department of Economic History, Lund University)

Abstract

This paper presents an empirical analysis of the relation between unemployment and macroeconomic performance. A strong correlation has been pointed out before, but a crucial question is over what time-horizon this holds. To the best of our knowledge, no previous cross-country study has shown that there is a long-run relationship between unemployment and macroeconomic performance over a time-period that stretches before the 1960s. To address this issue, we use wavelet analysis to decompose the time series into short, medium and long-run variations, and band spectrum regressions on the relation between unemployment, GDP, investment, long-term interest rate and TFP, covering ten countries 1913-2016. This methodology has several advantages compared to standard econometrical methods and other tools for decomposition. Our results show that unemployment correlates negatively with the long-run components of investment. This suggests that aggregate demand and capital formation inuence long-term labor market outcomes. According to our estimates ca 17-percent of overall variations in unemployment and 29 percent of the long-run variations may be explained by long-run variations in capital formation.

Suggested Citation

  • Hegeland, Erik & Taalbi, Josef, 2019. "What determines unemployment in the long run? Band spectrum regression on ten countries," Lund Papers in Economic History 203, Lund University, Department of Economic History.
    • Handle: RePEc:hhs:luekhi:0203
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    More about this item

    Keywords

    unemployment; capital formation; wavelets; multiple equilibria;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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