Global Shocks and Unemployment Adjustment

Ronald Smith and Gylfi Zoega

No 401, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

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.

Keywords: unemployment dynamics; principal components; labour market institutions (search for similar items in EconPapers)
JEL-codes: E2 J1 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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https://eprints.bbk.ac.uk/id/eprint/27103 First version, 2004 (application/pdf)

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Working Paper: Global Shocks and Unemployment Adjustment (2004)
Working Paper: Global Shocks and Unemployment Adjustment (2004)
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