Josef Taalbi

Senior lecturer

What determines unemployment in the long run? : Band spectrum regression on ten countries, 1913-2016

Author

Erik Hegelund
Josef Taalbi

Summary, in English

This paper presents an empirical analysis of the relation between un-
employment and macroeconomic performance. A strong correlation has
been pointed out before, but a crucial question is over what time-horizon
this holds. To the best of our knowledge, no previous cross-country study
has shown that there is a long-run relationship between unemployment
and macroeconomic performance over a time-period that stretches before
the 1960s. To address this issue, we use wavelet analysis to decompose the
time series into short, medium and long-run variations, and band spec-
trum regressions on the relation between unemployment, GDP, invest-
ment, long-term interest rate and TFP, covering ten countries 1913-2016.
This methodology has several advantages compared to standard econo-
metrical methods and other tools for decomposition. Our results show
that unemployment correlates negatively with the long-run components
of investment. This suggests that aggregate demand and capital formation
inuence long-term labor market outcomes. According to our estimates
ca 17-percent of overall variations in unemployment and 29 percent of
the long-run variations may be explained by long-run variations in capital
formation.

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