2/2016 Pierre Lafourcade et al. Labour market modelling in the light of the financial crisis


Occasional Paper Series 2/2016

Pierre Lafourcade, Andrea Gerali, Jan Brůha, Dirk Bursian, Ginters Buss, Vesna Corbo, Markus Haavio, Christina Håkanson, Tibor Hledik, Dmitry Kulikov, Matija Lozej, Brian Micallef, Dimitris Papageorgiou, Juuso Vanhala and Marin Zeleznik. Labour market modelling in the light of the financial crisis

This paper revisits the empirical relationship between unemployment and output, and its evolution following the financial crisis of 2008, with the aim of drawing potential consequences for labour market modelling strategies in place within the European System of Central Banks (ESCB). First, the negative correla-tion between output and unemployment (Okun’s law) at cyclical frequencies is found to be a robust feature of macro data across time, countries and identification schemes. Focusing on the euro area, the financial distress seems to have altered the dynamics of output and unemployment mainly at lower frequencies, inter-preted as trend developments by the statistical filters used in the analysis. Looking at the implications for modelling strategies, we propose an extension of the standard labour search and matching model in which financial frictions impinge directly on the labour market rather than on the capital market, opening the way to protracted and lagged response of employment after a “financial” crisis. In terms of policy implications, the importance of the interplay between financial and labour market frictions in trend developments should be read as strong support for an ambitious structural reform agenda in Europe, so as to make our labour (and goods) markets more flexible and resilient.

JEL Codes: E1, E32, J64

DOI: 10.23656/24613800/22016/0056

Keywords: labour market, financial crisis, unemployment, output, macro-economic models of the labour market

Corresponding author’s e-mail address: Pierre.Lafourcade [at] ecb.europa.eu

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank or the Eurosystem.