Unemployment in the 21st Century: The Interaction between Macroeconomic Shocks and Institutions

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This paper analyses the driving factors of youth- and adult unemployment in the OECD-countries during the 21st century. Focus is on both macroeconomic shock variables, such as the GDP-gap, the real interest rate and total factor productivity-growth, and institutional variables, such as union density, active labour market policies, the tax wedge, the replacement rate and the share of temporary employment contracts. The interactions between shocks and institutions are also evaluated. This is done empirically in with a panel data regression analysis on 25 OECD-countries annually during 1999-2017. The result of the paper is that the replacement rate, the tax wedge and the real interest rate seem to increase the unemployment rates. Spending on active labour market policies, the share of temporary employment contracts and the GDP-gap are found to reduce the unemployment rates. Adding interactions to the model does not improve the fit very much. A variable on the size of the public sector is added to the analysis but found insignificant in explaining unemployment.

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