Labour Markets
Persistent responses

Disparities in the OECD countries' experiences of unemployment may reflect both the short-run impact of labour demand shocks on equilibrium unemployment and prolonged effects arising from lags in employment determination, wage setting and labour force participation. In Discussion Paper No. 858, Marika Karanassou and Programme Director Dennis Snower show that significant differences in these lags in Germany, Spain, the UK and US may partly account for their very different responses to the global recessions of the past two decades. They consider both `unemployment persistence' (the prolonged effects of a temporary labour demand shock) and `imperfect unemployment responsiveness' (the delayed effects of a permanent shock). While the macroeconomic literature has focused on persistence, there are still no general measures for comparing the responses of systems with different dynamic structures. Imperfect responsiveness has received less attention, but there is no evidence that shocks are predominantly temporary, and responses to permanent shocks may be quite different.

Karanassou and Snower's empirical estimates suggest that the lags responsible for the slow recovery of employment from the global recessions differed substantially in Germany, Spain and the UK. Different countries may therefore require quite different solutions to `the same' unemployment problem, operating for example through the effects on lag structures of changes in job security legislation or wage subsidies to the long-term unemployed. Their empirical results also indicate that unemployment in Spain, the UK and the US is persistent and under-responsive, while German unemployment is persistent and over-responsive. Spain's unemployment is more persistent than the UK's but also less under-responsive. Unemployment reaches its long-run equilibrium more rapidly in the UK than in Germany after a temporary shock, but the opposite holds after a permanent shock. Both countries have recovered only slowly from the global recessions, but their reasons for so doing may be quite different. In general, countries' relative employment performance may depend significantly on the nature of their labour market shocks.

Explaining Disparities in Unemployment Dynamics
Marika Karanassou and Dennis J Snower

Discussion Paper No. 858, November 1993 (HR)