title: Effects of macroeconomic shocks on unemployment rates across the Euro area
Creators: name: WANG, Zhe
Publisher: name: University of Reading
Year: 2021

description: This thesis studies the effects of macroeconomic shocks on unemployment rates across the Euro Area (EA) over the course of a whole business cycle. It consists of three main chapters. Chapter 1 focuses on identifying whether common monetary policy shocks conducted by the European Central Bank (ECB) have effects on national unemployment rates in the member-states of the European Monetary Union (EMU), and how heterogenous the effects are. Chapter 2 examines the extent to which the effects of shocks on unemployment are intermediated by various labor market institutions associated with each of the EA national economies. Chapter 3 looks at gender unemployment differences, asking whether an adverse shock leads to a larger increase in the unemployment rate for females relative to males, taking into account the role of labor market institutions. Heterogeneous effects of single monetary policy on unemployment rates in the largest EMU countries Employing the baseline New Keynesian dynamic stochastic general equilibrium model with unemployment developed by Galí-Smets-Wouters (2012), we explore the potential heterogeneous effects of the single monetary policy conducted by the ECB on unemployment rates in a monetary union. More specifically, we compare the Bayesian estimates and the implied macro-dynamics using quarterly data for the time period 1999Q1-2017Q4 in the largest EMU countries, namely, France, Germany, Italy and Spain, which also represent four different trends in European unemployment. The results uncover that ECB monetary policy shocks are likely to play an important role in driving fluctuations in national unemployment rates in our EMU sample, not only in the short run but also in the medium and long run. Moreover, the heterogeneity in the effect of ECB monetary policy on unemployment rates is evident in two aspects: first, the unemployment rate increases in all four EMU countries in response to the tightening of monetary policy but with various degrees of dynamic responses in terms of elasticity and persistence. Spain is the most affected, while the effects in France are twice lower, and Germany and Italy fall in-between. Second, the common Zero Lower Bound monetary policy of the post-crisis period manifests itself differently in countries characterized by “low debt-low risk premium” from countries characterized by “high debt-high risk premium”: for instance, it results in a reduced unemployment rate in France and Germany but an increased unemployment rate in Italy and Spain. Unemployment across the Euro Area: the role of shocks and labor market institutions Heterogeneity in unemployment trends across the EA is most likely determined by the inherited diversity of national labor market institutions and mechanisms. Based on a panel data set of 11 EA countries over the period 1999-2013, this chapter empirically analyses the direct effects of shocks and labor market institutions on unemployment, on the one hand, and the indirect effects of labor market institutions on changing the transmission of shocks to unemployment, on the other hand. The shocks consist of: 1) total factor productivity shocks, 2) the real long-term interest rate, 3) labor demand shocks, 4) ECB money supply shocks and 5) ECB unsystematic monetary policy shocks. The labor market institutions cover the unemployment benefit system, active labor market policies, employment protection laws, the system of wage determination and the labor tax wedge. The results suggest that the real interest rate and labor demand shocks significantly affect the unemployment rate in the EA. As for labor market institutions, strict employment protection laws play a favorable role, correlated with a reduction in unemployment. In contrast, a higher tax wedge tends to have an adverse effect on unemployment, not only directly increasing unemployment but also indirectly amplifying the effects of shocks on unemployment. Macroeconomic shocks and the gender unemployment gap across the Euro Area This chapter aims at shedding light on whether some demographic groups are more likely to be unemployed in response to adverse shocks. Using data from 11 EA countries over the 2000-2013 period, we first examine the impact of shocks on unemployment rates by gender. The shocks include the rate of productivity growth, the real long-term interest rate, labor demand shocks, and monetary policy shocks. Second, we further disaggregate gendered unemployment rates by age, marital status, and education, and investigate the impact of shocks on unemployment rates of various demographic groups across the EA. We find that reductions in labor demand are associated with a relatively larger increase in unemployment rates for women, particularly for young and less-educated women. Similarly and more notably, a contractionary monetary policy is significantly correlated with a rise in the female unemployment rate, while it does not show any significant impact on the male unemployment rate.