Euorpean Crisis
CAUSES OF UNEMPLOYMENT IN EUROPEAN COUNTRIES
Blanchard,2006; Adnett ch.7.4
Unemployment rates, 1970-2002
12
10
8 USA Japan 6 Korea EU 4
2
0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
Source: OECD data
Two models to explain EU unemployment
• Eurosclerosis: due to labour market rigidites the natural (equilibrium) unemployment rate rises • Histeresis: unemployment increases due to demand/supply shocks (i.e.technological shocks which shift labour demand from the low to the high skilled; or macroeconomic shocks due to restrictive macro policies). With hysteresis there is unemployment persistence which does not consent the unemployment to decline, even when the economic conditions improve.
CAUSES OF HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES/ 1
Why did unemployment rise more in Europe than in other countries and persisted at high levels since the first oil shock and up to the early nineties? How much the unemployment rise was due: to greater adverse effects of shocks or to European institutions, bad equipped to deal with shock and rapidly adjust to changing economic conditions? No single causes, but interaction of negative shocks and institutions: • negative macroeconomic shocks: worsening of terms of trade restrictive macroeconomic policies to reduce inflation technology international competition • persistence and influence of past shocks due to institutions: wage bargaining, employment protection, barriers to labour mobility taxation on employment UB
CAUSES OF THE HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES /2
Initial shocks had more adverse effects on EU labour markets due to real wage rigidity which produced higher unemployment costs for a given reduction in inflation. Initial shocks: increases in oil prices, worsening of terms of trade, slowing down of productivity, shift of labour demand from low skilled to high skilled due to technological progress
Determinants of structural unemployment in the EU
Higher real wage
Blanchard,2006; Adnett ch.7.4
Unemployment rates, 1970-2002
12
10
8 USA Japan 6 Korea EU 4
2
0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
Source: OECD data
Two models to explain EU unemployment
• Eurosclerosis: due to labour market rigidites the natural (equilibrium) unemployment rate rises • Histeresis: unemployment increases due to demand/supply shocks (i.e.technological shocks which shift labour demand from the low to the high skilled; or macroeconomic shocks due to restrictive macro policies). With hysteresis there is unemployment persistence which does not consent the unemployment to decline, even when the economic conditions improve.
CAUSES OF HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES/ 1
Why did unemployment rise more in Europe than in other countries and persisted at high levels since the first oil shock and up to the early nineties? How much the unemployment rise was due: to greater adverse effects of shocks or to European institutions, bad equipped to deal with shock and rapidly adjust to changing economic conditions? No single causes, but interaction of negative shocks and institutions: • negative macroeconomic shocks: worsening of terms of trade restrictive macroeconomic policies to reduce inflation technology international competition • persistence and influence of past shocks due to institutions: wage bargaining, employment protection, barriers to labour mobility taxation on employment UB
CAUSES OF THE HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES /2
Initial shocks had more adverse effects on EU labour markets due to real wage rigidity which produced higher unemployment costs for a given reduction in inflation. Initial shocks: increases in oil prices, worsening of terms of trade, slowing down of productivity, shift of labour demand from low skilled to high skilled due to technological progress
Determinants of structural unemployment in the EU
Higher real wage