Characteristics of Unemployment Dynamics: The Chain Reaction Approach

58 Pages Posted: 12 May 2001  

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Marika Karanassou

University of London, Queen Mary - Department of Economics ; Institute for the Study of Labor (IZA)

Date Written: March 2000

Abstract

The aim of this paper is to analyze and estimate salient characteristics of unemployment dynamics. Movements in unemployment are viewed as "chain reactions" of responses to labor market shocks, working their way through systems of interacting lagged adjustment processes. In the context of estimated labor market systems for Germany, the UK, and the US, we construct aggregate measures of unemployment responses to temporary and permanent shocks. These measures are temporal (depicting how long it takes for unemployment to reach long-run equilibrium) and quantitative (depicting the cumulative amount of unused labor resources generated in the aftermath of a shock). Furthermore, we estimate the contributions of individual lagged adjustments to these aggregate measures.

Our empirical results indicate that (i) lagged adjustment processes play an important part in explaining how temporary and permanent shocks affect unemployment, (ii) temporary and
permanent shocks can yield quite different inter-country comparisons of unemployment effects, and (iii) the quantitative and temporal measures can also yield markedly different inter-country comparisons. This analysis provides insights into the driving forces underlying the movements of unemployment in the countries above.

JEL Classification: J32, J60, J64, E30, E37

Suggested Citation

Snower, Dennis J. and Karanassou, Marika, Characteristics of Unemployment Dynamics: The Chain Reaction Approach (March 2000). IZA Discussion Paper No. 127. Available at SSRN: https://ssrn.com/abstract=224232

Dennis J. Snower (Contact Author)

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Marika Karanassou

University of London, Queen Mary - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7975 5090 (Phone)
+44 20 7983 3580 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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