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THE EU–US UNEMPLOYMENT PUZZLE REVISITED: INSTITUTIONS, DEMOGRAPHY, AND CAPITAL FLOWS

Published online by Cambridge University Press:  24 August 2017

Luca Marchiori
Affiliation:
Central Bank of Luxembourg
Olivier Pierrard
Affiliation:
Central Bank of Luxembourg
Henri R. Sneessens*
Affiliation:
Université du Luxembourg and Université catholique de Louvain
*
Address correspondence to: Henri R. Sneessens, CREA, Université du Luxembourg; IRES, Université catholique de Louvain; and IZA, Bonn, Germany; e-mail: henri.sneessens@uni.lu.
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Abstract

The historical evolution of the EU–US unemployment-rate gap is often explained in the literature in terms of asymmetric changes in labor-market institutions. There may well also be asymmetries in population aging, which may generate international capital flows and have substantial impacts on relative unemployment rates. In this paper, we ask whether the combination of institutions, aging, and capital flows explains the rise in the unemployment gap between 1960 and 2010. To this end, we set up a two-region OLG model with search unemployment in which we introduce the historical and projected changes in labor-market institutions and demographics. We show that asymmetric institutional changes alone can reproduce a large part of the historical rise in the unemployment gap. However, this result no longer holds once we add asymmetric aging in closed economies. We find this initial result again, and in an even stronger form, when we allow for international capital mobility.

Type
Research Paper
Copyright
Copyright © Université catholique de Louvain 2017 

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Footnotes

The views expressed in this paper are the personal views of the authors and do not necessarily reflect those of the Banque centrale du Luxembourg or the Eurosystem.

References

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