**Table 12: Relationship between Employment and GDP across GIPS**

|||**2000‐20**<br>|**14 Period**<br>|||**2009‐20**<br>|**14 Period**<br>||
|---|---|---|---|---|---|---|---|---|
|Dep. Var:|GRC_Empl.|IRE_Empl.|PRT_Empl.|ESP_Empl.|GRC_Empl.|IRE_Empl.|PRT_Empl.|ESP_Empl.|
|GRC_GDP|0.54***<br>(0.00)||||0.68***<br>(0.00)||||
|IRE_GDP||0.61***<br>(0.00)||||0.065<br>(0.56)|||
|PRT_GDP|||0.40***<br>(0.00)||||1.02***<br>(0.00)||
|ESP_GDP||||0.92***<br>(0.00)||||0.93***<br>(0.00)|
|2009‐14|‐0.01<br>(0.31)|‐0.08***<br>(0.00)|‐0.08***<br>(0.00)|‐0.07***<br>(0.00)|||||
|Constant|2.54***|1.15***|4.29***|‐1.53***|0.98*|6.86***|‐2.42**|‐1.73|
||(0.00)|(0.00)|(0.00)|(0.00)|(0.09)|(0.00)|(0.03)|(0.20)|
|# of obs.|56|60|60|60|24|24|24|24|
|R‐squared|0.84|0.86|0.76|0.84|0.84|0.56|0.65|0.42|
|Prob>F|0.00|0.00|0.00|0.00|0.00|0.01|0.00|0.00|

Simple OLS model is used. Robust p‐values are shown in parentheses, and significance at the 1% (***), 5% (**), and 10% (*) levels are indicated. _Gdp : log of quarterly GDP, chain linked values (2010), million Euro, Eurostat. _Empl. : log of quarterly total employment, thousands of people, Eurostat. 2009‐14: dummy for the years in 2009‐2014 period How do GIPS compare to other Euro area countries? Euro area employment overall remains 4% below its pre‐crisis peak.<sup>79</sup> Almost all euro area countries had some UE in the first recession (2008‐09), but over the course of the second euro area recession (3Q 2011 to end 2012), job losses were mostly in the “stressed economies” (Ireland, Greece, Spain, Italy, Cyprus, Portugal and Slovenia). In the first recession, publicly provided activities supported employment and in the second recession, public sector employment took a downturn in countries affected by the second crisis. The EC, the OECD and the IMF estimate that there was an increase in the structural UE rate in the euro area of around 1.6 pp between 2008 and 2013.<sup>80</sup> _<u>The long term cost of unemployment.</u>_ Blanchard et al (2015) looking at 122 recessions over the past 50 years in 23 countries find that, for 2/3 of the cases, recessions have been followed by lower output relative to trend and even lower growth in many cases. They contend that the probability of hysteresis argues for more aggressively expansionary monetary and fiscal policies. They also find that the elasticity of inflation with respect to the unemployment rate has increased over time, in the aftermath of crises. The implication of this change would be that monetary policy should put more emphasis on the unemployment gap rather than on inflation as the focus on inflation becomes more costly in terms of foregone output. Other studies suggest that financial crises can permanently reduce potential output by 1.5‐4%, though per capita growth can eventually return to the pre‐crisis rate (e.g. Furceri and Mourougane, 2009). However, the time it takes to return to the previous path is uncertain and empirical studies find that capital and employment suffer enduring losses relative to trend. For example, in the countries they analyze, EC (2009) find that employment does not recover even after 10 years. Policy matters in this regard. Fatas and Summers (2016) find that the global financial crisis has permanently

> 79 ECB, 2014c.

> 80 This is an average across the estimates of the three institutions.

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