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What determines unemployment in the long run? Band spectrum regression on ten countries 1913-2016
Stockholm University, Faculty of Social Sciences, Department of Economic History and International Relations.ORCID iD: 0000-0002-4718-6434
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The rise in unemployment since the 1980s has been predominantly understood as driven by short-term shocks and rigid labor market institutions (Blanchard and Wolfers, 2000; Layard et al., 2005), while others have pointed to 'jobless growth' and job matching (Pissarides, 2000). While most studies focus on short-run explanations, this paper presents an analysis of the long-run determinants of unemployment. To the best of our knowledge, no previous cross-country study has investigated the 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 time series covering ten countries 1913-2016, into short-, medium-, and long-run variations, and band spectrum regressions on the relation between unemployment, GDP, investment, interest rate and productivity. This methodology has several advantages compared to standard econometrical methods and other tools for decomposition. Through estimations of cross-country regression models, we find strong indications that unemployment correlates negatively with the long-run components of investment. About 17 percent of overall variations and 29 percent of long-run variations in unemployment are explained by long-run variations in capital formation. In structural break models on each of the ten countries we find that capital formation explains between 43 percent and 84 percent of variations in unemployment. For most countries, long-run shifts in capital formation are associated with long-run shifts in unemployment in the opposite direction. Our analysis hence suggests the importance of understanding aggregate demand and capital formation if we wish to understand long-term labor market outcomes.

Keywords [en]
Unemployment, wavelets, capital formation
National Category
Economic History
Research subject
Economic History
Identifiers
URN: urn:nbn:se:su:diva-177230OAI: oai:DiVA.org:su-177230DiVA, id: diva2:1380466
Funder
Ragnar Söderbergs stiftelseThe Jan Wallander and Tom Hedelius Foundation, P15-0133Available from: 2019-12-18 Created: 2019-12-18 Last updated: 2019-12-19Bibliographically approved
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CiteExportLink to record
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Citation style
  • apa
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