Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 34: Common Trends and Hysteresis in Unemployment

Tor Jacobson (), Anders Vredin () and Anders Warne
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Anders Vredin: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

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

JEL-codes: E24

44 pages, November 1994

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