Unemployment Dynamics Across OECD Countries

The European Community and the U.S. have experienced vastly different unemployment dynamics over the last two decades. This paper investigates whether these differences are due to exposure to different shocks or reacting differently to the same shocks. With the premise of a search theoretic framework and a structural VAR methodology, the paper robustly identifies aggregate versus reallocative shocks. With the exception of Spain where most of the dynamics seems to be driven by reallocation, it is found that most differences in unemployment dynamics arise because of differences in responses to shocks. In particular the U.S. Labor market is quicker to adjust than the European Community. This implies that EEC economies might be dynamically "sclerotic," even if the size of the steady state labor market flows give the impression that European Labor markets are quite active. Various identifying assumptions, additional labor supply shocks and different variables are used so that the results seem to be robust