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IZA
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Unemployment in the European Union: A Dynamic Reappraisal
by
Marika Karanassou, Hector Sala, Dennis J. Snower
(July 2002)
published in: Economic Modelling, 2003, 20 (2), 237-273
Abstract:
This paper examines the movements in EU unemployment from two perspectives: (a) the
NRU/NAIRU perspective, in which unemployment movements are attributed largely to
changes in the long-run equilibrium unemployment rate and (b) the chain-reaction
perspective, in which unemployment movements are viewed as the outcome of the interplay
between labor market shocks and prolonged lagged adjustment processes. We present an
empirical analysis that distinguishes between unemployment movements arising from longrun
equilibrium changes and those arising from lagged intertemporal adjustments. This
analysis has far-reaching policy implications. Our analysis shows that the rise in EU
unemployment over the 1970s and first part of the 1980s was due largely to permanent
shocks (especially the rise in working-age population and the decline in capital formation),
whereas the unemployment increase in the first part of the 1990s was due largely to
temporary shocks (especially the fall in competitiveness and the rise in real interest rates).
Text: See Discussion Paper No. 531 
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