Series: Working Papers. 2616.
Author: Marta García-Rodríguez and Clemente Pinilla-Torremocha
European Union
- Labour market
- Economic growth and convergence
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Abstract
We show that the joint behavior of confidence measures and unemployment in a panel of European countries favors a view of labor market fluctuations driven largely by a shock that does not affect unemployment contemporaneously but affects it persistently over business-cycle horizons and explains the majority of the forecast error variance of confidence measures. This shock is captured in firm and household surveys and is almost perfectly correlated (-0.95) with non-technological disturbances driving the longrun behavior of unemployment, but only modestly correlated with shocks affecting longrun productivity. One structural interpretation is that it represents news about future nontechnological fundamentals, which is first captured in confidence measures. This shock accounts for 50% of unemployment variance at business-cycle frequency. It behaves as a mildly inflationary and transitory demand shock, raising investment, wages, interest rates, fiscal surplus and vacancies, is orthogonal to identied monetary policy shocks, and induces professional forecasters to revise unemployment expectations downward.