Two questions about European unemployment

Lars Ljungqvist, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    A general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers. The model explains how, before the 1970s, lower flows into unemployment gave Europe lower unemployment rates than the United States and also how, after 1980, higher durations have kept unemployment rates in Europe persistently higher than in the United States. These outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers. Those bigger skill losses also explain why U.S. workers have experienced more earnings volatility since 1980 and why, especially among older workers, hazard rates of gaining employment in Europe now fall sharply with increases in the duration of unemployment.

    Original languageEnglish (US)
    Pages (from-to)1-29
    Number of pages29
    JournalEconometrica
    Volume76
    Issue number1
    DOIs
    StatePublished - Jan 2008

    Keywords

    • Discouraged worker
    • Employment protection
    • Job
    • Obsolescence
    • Search
    • Skills
    • Turbulence
    • Unemployment
    • Unemployment insurance

    ASJC Scopus subject areas

    • Economics and Econometrics

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