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Is unemployment on steroids in advanced economies?

Author

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  • Bella Gabriel Di

    (International Monetary Fund, Washington, DC, USA)

  • Grigoli Francesco

    (International Monetary Fund, Washington, DC, USA)

  • Ramírez Francisco

    (Central Bank of the Dominican Republic, Santo Domingo, Dominican Republic)

Abstract

Conventional macroeconomic theory is based on the idea that demand shocks can only have temporary effects on unemployment, however several European economies display highly persistent unemployment dynamics. The theory of hysteresis points out that, under certain conditions, demand disturbances can have permanent effects. We find strong evidence of unemployment hysteresis in advanced economies since the 1990s. Relying on an identification scheme instigated by an insider/outsider model, we exploit the heterogeneity in impulse responses to demand shocks to investigate what labor institutions soften or amplify these responses. Our results indicate that strengthening labor institutions that promote a faster adjustment of real wages, removing disincentives for firms to hire and for workers to be employed, and improving the matching between labor supply and demand can lessen the effects of adverse demand shocks and lead to a faster reversion of unemployment rates to pre-shock levels.

Suggested Citation

  • Bella Gabriel Di & Grigoli Francesco & Ramírez Francisco, 2020. "Is unemployment on steroids in advanced economies?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-17, January.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:17:n:24
    DOI: 10.1515/bejm-2019-0064
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    Cited by:

    1. Belke Ansgar, 2018. "Secular Stagnation, Unemployment Hysteresis and Monetary Policy in EMU: Scratches but Not Scars?," The Economists' Voice, De Gruyter, vol. 15(1), pages 1-14, December.

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    More about this item

    Keywords

    advanced economies; heterogeneous dynamics; hysteresis; panel VAR; unemployment persistence;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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