Labour Market Modelling in the Light of the Financial Crisis

69 Pages Posted: 25 Aug 2016

See all articles by Pierre M Lafourcade

Pierre M Lafourcade

De Nederlandsche Bank

Andrea Gerali

Bank of Italy

Jan Bruha

Czech National Bank (CNB)

Dirk Bursian

Deutsche Bundesbank

Ginters Buss

Bank of Latvia

Vesna Corbo

Sveriges Riksbank - Monetary Policy

Markus Haavio

Bank of Finland - Research

Christina Håkanson

Sveriges Riksbank

Tibor Hlédik

Czech National Bank

Gabor Katay

Banque de France

Dmitry Kulikov

Bank of Estonia

Matija Lozej

Central Bank of Ireland; University of Primorska

Brian Micallef

Central Bank of Malta - Modelling and Research Office

Dimitris Papageorgiou

Bank of Greece

Juuso Vanhala

Bank of Finland

Martin Zeleznik

National Bank of Slovakia

Date Written: August 24, 2016

Abstract

This paper revisits the empirical relationship between unemployment and output, and its evolution following the financial crisis of 2008, with the aim of drawing potential consequences for labour market modelling strategies in place within the European System of Central Banks (ESCB). First, the negative correlation between output and unemployment (Okun’s law) at cyclical frequencies is found to be a robust feature of macro data across time, countries and identification schemes. Focusing on the euro area, the financial distress seems to have altered the dynamics of output and unemployment mainly at lower frequencies, interpreted as trend developments by the statistical filters used in the analysis. Looking at the implications for modelling strategies, we propose an extension of the standard labour search and matching model in which financial frictions impinge directly on the labour market rather than on the capital market, opening the way to protracted and lagged response of employment after a “financial” crisis. In terms of policy implications, the importance of the interplay between financial and labour market frictions in trend developments should be read as strong support for an ambitious structural reform agenda in Europe, so as to make our labour (and goods) markets more flexible and resilient.

Keywords: labour market, financial crisis, unemployment, output, macroeconomic models of the labour market

JEL Classification: E1, E32, J64

Suggested Citation

Lafourcade, Pierre M and Gerali, Andrea and Bruha, Jan and Bursian, Dirk and Buss, Ginters and Corbo, Vesna and Haavio, Markus and Håkanson, Christina and Hlédik, Tibor and Katay, Gabor and Kulikov, Dmitry and Lozej, Matija and Micallef, Brian and Papageorgiou, Dimitris and Vanhala, Juuso and Zeleznik, Martin, Labour Market Modelling in the Light of the Financial Crisis (August 24, 2016). ECB Occasional Paper No. 175, Available at SSRN: https://ssrn.com/abstract=2828661

Pierre M Lafourcade (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jan Bruha

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Dirk Bursian

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Ginters Buss

Bank of Latvia ( email )

Riga, 1050
United States

Vesna Corbo

Sveriges Riksbank - Monetary Policy ( email )

SE-103 37 Stockholm
Sweden

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Christina Håkanson

Sveriges Riksbank ( email )

SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.se

Tibor Hlédik

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Gabor Katay

Banque de France ( email )

Paris
France

Dmitry Kulikov

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

Matija Lozej

Central Bank of Ireland ( email )

Dame Street
Dublin, 2
Ireland

University of Primorska ( email )

Glagoljaska 8
Koper, SI-6000
Slovenia

Brian Micallef

Central Bank of Malta - Modelling and Research Office ( email )

Valletta, 1060
Malta

Dimitris Papageorgiou

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Juuso Vanhala

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Martin Zeleznik

National Bank of Slovakia ( email )

Imricha Karvasa 1
813 25 Bratislava
Slovakia

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