Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 34:
Common Trends and Hysteresis in Unemployment

Tor Jacobson (), Anders Vredin () and Anders Warne

Abstract: We examine the sources of labor market fluctuations in the Scandinavian countries using VAR models with common trends. Our primary concerns are the sources of hysteresis in unemployment and possible differences between the economies. A simple economic model is presented to motivate our identifying assumptions. We show how estimates of the theoretical parameters may be obtained from the estimated common trends coefficients. The empirical results suggest that (i) the only common source of hysteresis in the Scandinavian labor markets is shocks to wage setting (or, equivalently, equilibrium unemployment); (ii) transitory labor demand shocks, which are emphasized in the theoretical literature on hysteresis, do not seem to be empirically important.

Keywords: Common trends; hysteresis; identification; structural parameters; supply and demand shocks; unemployment; (follow links to similar papers)

JEL-Codes: E24; (follow links to similar papers)

44 pages, November 1994

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This paper is published as:
Jacobson, Tor, Anders Vredin and Anders Warne, (1997), 'Common Trends and Hysteresis in Scandinavian Unemployment', European Economic Review, pages 1781-1816

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