Page 226 - ePaper
P. 226
Employment and Social Developments in Europe 2014
Furthermore, if the downturn persists and is delayed by one year, the probability of developments in the labour market can
entitlement to unemployment benefits finding a job in the following two years translate into longer periods in education
expire after a certain period, reductions falls from 60 % to 16 % for men and from for cohorts who are about to enter the
in unemployment benefit outlays will put 47 % to 13 % for women. Arulampalam labour market.
additional downward pressure on aggre - (2001) — using UK data for the 1991–
gate demand as well as social cohesion. 97 period — reports that unemployment Thirdly, the impact of a downturn on
carries a wage penalty of about 6 % on retirement decisions is twofold. On
Secondly, some additional adverse feed - re-entry in Britain and that, after three the one hand, when economic activity
backs arise from the financial markets, years, they are earning 14 % less than slows down and employers want to fire
53
notably as liquidity ( ) and credit con- if they had not been unemployed. Ball employees to meet the fall in activity,
straints hinder households’ borrowing (2009) provides evidence from 20 devel - early retirement may be the preferred
and spending, with a view to smooth- oped countries that points to a degenera - exit route. On the other hand, if the
ing their consumption over time, par- tion of skills, a reduction in motivation crisis has a strong adverse impact on
ticularly at the lower end of the income to search for a job and stigmatisation their (financial) wealth, older workers
distribution ( ). when unemployment spells persist, may have a strong incentive to post -
54
while Edin and Gustavsson (2008) report pone their retirement. See, for instance,
… labour market hysteresis similar results using Swedish data from OECD (2010).
effects … two waves (1994 and 1998) ( ). On the
56
other hand, when the job of the ‘main … and distorted product
Once a negative demand shock disap- breadwinner’ becomes precarious, other market feedbacks.
pears, the economy will start to revert members of the family may become
towards equilibrium. However, several more economically active — the ‘added The employment impact of a temporary
adverse labour market feedbacks may worker effect’ — partly offsetting the ini - asymmetric shock depends not only on
prevent a return to pre-shock levels of tial hysteresis effects. See, for instance, the nature of the shock but also on the
employment and output ( ). European Commission (2013). cyclical behaviour of prices and wages. To
55
the extent that prices react to changes in
Firstly, persistent spells of unemploy- Secondly, apart from the direct labour nominal wages with a lag (i.e. pro-cycli-
ment may erode the employability of market effects on the unemployed per- cal real wages) the domestic purchasing
57
unemployed persons as well as their sons, such outcomes are also associated power of wage earners will decrease ( ),
earnings potential (for example: due to a with adverse impacts on their health, as further deepening the downturn ( ).
58
loss of skills; decline in the motivation to well as poorer academic performance Chart 27 provides some empirical evi-
look for a job; and stigmatisation in the and reduced earnings opportunities dence ( ) on the pass-through of changes
59
eyes of potential employers). Cockx and for their children — all of which have in nominal wages (adjusted for productiv -
Picchio (2013) — using Belgian panel an adverse impact on potential out- ity, i.e. nominal unit labour cost) to output
data covering the labour market history put in the long run (see, for instance, prices in the euro area (see Box 3 and
of young people over the 1998–2002 Dao and Loungani (2010) and Bell and Annex for more technical details on the
period — report that, if job market entry Blanchflower (2011)). However, adverse specification and estimation).
( ) Liquid assets (including cash and checking
53
accounts) are vital to meet uncertain
consumption needs. Liquidity constraints
amplify business cycle volatility and have
nonlinear effects on risk premia. See, for
instance, Jaccard (2013).
54
( ) Furthermore, downward pressure on prices
will increase both the real incomes but also
the real value of debt and real interest rates
affecting notably debtors, which can in turn,
have a negative feedback on aggregate
demand.
( ) Also see Blanchard and Summers 1986 for
55
an analysis of the impact of an increase in
the structural unemployment on employees’
reservation wage and bargaining power, and ( ) i.e. in absolute (via the real wage effect) and
57
real wages dynamics. See, for instance, Ball relative terms (via the labour income share
(2014) and Hall (2014) for an analysis of effect which is equal to the real wage effect
hysteresis effects that look beyond labour adjusted for productivity).
markets, including hysteresis in capital 58
accumulation and total factor productivity. ( ) Again, assuming that the marginal
Haltmaier (2012) reports regression results propensity to consume out of wage income
covering 40 countries that indicate that the is larger than the marginal propensity to
reduction in the capital-labour ratio as a consume out of capital income.
59
result of lower investment is the main driver ( ) For more details on labour market hysteresis ( ) Based on an econometric analysis using
56
of declines in potential output. See also effects see, for example, European quarterly data for the Member States of the
Summers and DeLong (2013). Commission (2013, Chapter 3). euro area over the 1995q1–2013q2 period.
224
Furthermore, if the downturn persists and is delayed by one year, the probability of developments in the labour market can
entitlement to unemployment benefits finding a job in the following two years translate into longer periods in education
expire after a certain period, reductions falls from 60 % to 16 % for men and from for cohorts who are about to enter the
in unemployment benefit outlays will put 47 % to 13 % for women. Arulampalam labour market.
additional downward pressure on aggre - (2001) — using UK data for the 1991–
gate demand as well as social cohesion. 97 period — reports that unemployment Thirdly, the impact of a downturn on
carries a wage penalty of about 6 % on retirement decisions is twofold. On
Secondly, some additional adverse feed - re-entry in Britain and that, after three the one hand, when economic activity
backs arise from the financial markets, years, they are earning 14 % less than slows down and employers want to fire
53
notably as liquidity ( ) and credit con- if they had not been unemployed. Ball employees to meet the fall in activity,
straints hinder households’ borrowing (2009) provides evidence from 20 devel - early retirement may be the preferred
and spending, with a view to smooth- oped countries that points to a degenera - exit route. On the other hand, if the
ing their consumption over time, par- tion of skills, a reduction in motivation crisis has a strong adverse impact on
ticularly at the lower end of the income to search for a job and stigmatisation their (financial) wealth, older workers
distribution ( ). when unemployment spells persist, may have a strong incentive to post -
54
while Edin and Gustavsson (2008) report pone their retirement. See, for instance,
… labour market hysteresis similar results using Swedish data from OECD (2010).
effects … two waves (1994 and 1998) ( ). On the
56
other hand, when the job of the ‘main … and distorted product
Once a negative demand shock disap- breadwinner’ becomes precarious, other market feedbacks.
pears, the economy will start to revert members of the family may become
towards equilibrium. However, several more economically active — the ‘added The employment impact of a temporary
adverse labour market feedbacks may worker effect’ — partly offsetting the ini - asymmetric shock depends not only on
prevent a return to pre-shock levels of tial hysteresis effects. See, for instance, the nature of the shock but also on the
employment and output ( ). European Commission (2013). cyclical behaviour of prices and wages. To
55
the extent that prices react to changes in
Firstly, persistent spells of unemploy- Secondly, apart from the direct labour nominal wages with a lag (i.e. pro-cycli-
ment may erode the employability of market effects on the unemployed per- cal real wages) the domestic purchasing
57
unemployed persons as well as their sons, such outcomes are also associated power of wage earners will decrease ( ),
earnings potential (for example: due to a with adverse impacts on their health, as further deepening the downturn ( ).
58
loss of skills; decline in the motivation to well as poorer academic performance Chart 27 provides some empirical evi-
look for a job; and stigmatisation in the and reduced earnings opportunities dence ( ) on the pass-through of changes
59
eyes of potential employers). Cockx and for their children — all of which have in nominal wages (adjusted for productiv -
Picchio (2013) — using Belgian panel an adverse impact on potential out- ity, i.e. nominal unit labour cost) to output
data covering the labour market history put in the long run (see, for instance, prices in the euro area (see Box 3 and
of young people over the 1998–2002 Dao and Loungani (2010) and Bell and Annex for more technical details on the
period — report that, if job market entry Blanchflower (2011)). However, adverse specification and estimation).
( ) Liquid assets (including cash and checking
53
accounts) are vital to meet uncertain
consumption needs. Liquidity constraints
amplify business cycle volatility and have
nonlinear effects on risk premia. See, for
instance, Jaccard (2013).
54
( ) Furthermore, downward pressure on prices
will increase both the real incomes but also
the real value of debt and real interest rates
affecting notably debtors, which can in turn,
have a negative feedback on aggregate
demand.
( ) Also see Blanchard and Summers 1986 for
55
an analysis of the impact of an increase in
the structural unemployment on employees’
reservation wage and bargaining power, and ( ) i.e. in absolute (via the real wage effect) and
57
real wages dynamics. See, for instance, Ball relative terms (via the labour income share
(2014) and Hall (2014) for an analysis of effect which is equal to the real wage effect
hysteresis effects that look beyond labour adjusted for productivity).
markets, including hysteresis in capital 58
accumulation and total factor productivity. ( ) Again, assuming that the marginal
Haltmaier (2012) reports regression results propensity to consume out of wage income
covering 40 countries that indicate that the is larger than the marginal propensity to
reduction in the capital-labour ratio as a consume out of capital income.
59
result of lower investment is the main driver ( ) For more details on labour market hysteresis ( ) Based on an econometric analysis using
56
of declines in potential output. See also effects see, for example, European quarterly data for the Member States of the
Summers and DeLong (2013). Commission (2013, Chapter 3). euro area over the 1995q1–2013q2 period.
224
