This paper presents a reappraisal of unemployment movements in the European Union. Our
analysis is based on the chain reaction theory of unemployment, which focuses on (a) the
interaction among labor market adjustment processes, (b) the interplay between these
adjustment processes and the dynamic structure of labor market shocks, and (c) the
interaction between the adjustment processes and economic growth. We divide the shocks
into institutional variables, price variables, and growth drivers. Estimating a system of labor
market equations for a panel of EU countries, we derive the dynamic unemployment
responses to each shock. Our analysis permits us to distinguish between the short- and longrun
effects of the shocks. Different shocks generate different degrees of “unemployment
persistence” (responses to temporary shocks) and “unemployment responsiveness”
(responses to permanent shocks). We find that the growth drivers play a dominant role in
accounting for the main swings in EU unemployment.
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