Mismatch Explanations of European Unemployment: A Critical Evaluation

213 Pages·1998·7.549 MB·English

by  Professor Horst Entorf (auth.)

European and Transatlantic Studies
Managing Editors
Jilrgen von Hagen, University of Bonn
Paul J.J. Welfens, University of Potsdam
Series Editors
Jilrgen von Hagen, University of Bonn
Paul J.J. Welfens, University of Potsdam
Barry Eichengreen, University of California at Berkeley
Michele Fratianni, Indiana University
Patrick Minford, University of Liverpool
Springer-Verlag Berlin Heidelberg GmbH
Titles in the Series
B. Eichengreen, J. Frieden, J. v. Hagen (Eds.)
Monetary and Fiscal Policy in an Integrated Europe
B. Eichengreen, J. Frieden, J. v. Hagen (Eds.)
Politics and Institutions in an Integrated Europe
Joao Loureiro
Monetary Policy in the European Monetary System
Horst Entorf
Mismatch
Explanations
of European
Unemployment
A Critical Evaluation
Acting Editor: Michele Fratianni
With 18 Figures
and 36 Tables
, Springer
Professor Horst Entorf
University of Wiirzburg
Institut rur Volkswirtschaftslehre
97070 Wiirzburg
Germany
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Die Deutsche Bibliothek - CIP Einheitsaufnahme
Entorf, Horst: Mismatch Explanations of European Unemployment 1 Horst
Entorf. - Berlin; Heidelberg; New York; Barcelona; Budapest; Hong Kong;
London; Milan; Paris; Tokyo: Springer, 1998
(European and transatlantic studies)
ISBN 978-3-642-63789-6 ISBN 978-3-642-58919-5 (eBook)
DOI 10..1007/978-3-642-58919-5
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Preface by Series Editor
Mismatching between those who want a job and those who hire is the
hypothesis of choice to explain higher unemployment rates in Europe.
Horst Entorf shows, painstakingly, that the claims of this hypothesis fall
wide short of the mark and challenges, by implication, the profession to
develop a more complex model to understand why European unemploy
ment rates are rising.
The basic line of inquiry of Horst Entorf can be summarised as follows.
Traditional measures of mismatching are inversely related to unemploy
ment rates, a contradiction of the claim made by the hypothesis. However,
the obvious inference is not legitimate because the explanatory variables
of matching functions have trends, and thus give rise to spurious statistical
results. To get around the problem, Entorf uses disaggregated data --40
occupations for the period 1971 to 1992--from the German labor markets
that are devoid of trend, typical of macroeconomic time series. One
inference from the tests applied to the new data is that matching functions
respond more to short-term fluctuations than to long-term factors, making
them less suitable for the rigid European labour markets than the flexible
U.S. labour market. Other inferences are that more education, more
training and increased availability of flexible-time or part-time jobs facilitate
the matching process. Regulations, laws, practices, and the general
reluctance of labor unions to accept more job flexibility hinder matching.
Even the disaggregated data show that mismatching is inversely
correlated with unemployment rates. This result can be explained by the
fact that the pool of qualified workers rises during rising unemployment,
making vacancies easier to fill. So, we are back to the initial question:
what can the matching hypothesis explain? This hypothesis has useful
things to say about the way the pool of unemployed finds its way to
employment, but is silent about the way mismatching influences unem
ployment rates. The challenge for labor market economists, Entorf con
cludes, is to build a model that develops the two mechanisms, and not
just one.
Horst Entorf has produced a fine example of applied economic analysis.
His work ought to be of interest, not only to labour economists, but also
to macroeconomists and econometricians.
Michele Fratianni
Acknowledgments
This volume on mismatch explanations of European unemployment is
grown out of my "Habilitation" thesis presented at the University of
Mannheim. I am indebted to Prof. Heinz Konig and Prof. Jurgen von Hagen
for supporting this work in many ways. My research project benefited
from financial grants given by the German Science Foundation (Deutsche
Forschungsgemeinschaft) and by the Commission of the European
Communities.
Part of the research presented in this book was performed during two
stays at the Universite Catholique de Louvain, Louvain-Ia-Neuve, and at
CREST, Paris. I would like to thank both research groups for their
hospitality and many stimulating discussions. I received helpful advice,
comments and suggestions from Luc Bauwens, Irene Bertschek, Jacques
Bughin, Jacques Dreze, David de la Croix, Stephane Gregoir, Francis
Kramarz, Guy Laroque, Stephane Lollivier, Alain Monfort, Fatemeh
Shadman-Mehta, Henri Sneessens, Alain Trognon and Hideki Yamawaki.
Georges Bourdalle and Jean-Pierre Lemaitre were indispensable for the
access to local computer facilities.
I gratefully acknowledge the pleasant atmosphere at the University of
Mannheim, where I benefited from discussions with my colleagues. For
excellent research assistance I thank Michalis Kavalakis, Peter Schwarz
and Christoph Sponda.
Special thanks go to the Editorial Board of European and Transatlantic
Studies, especially Michele Fratianni and Jurgen von Hagen, for their
comments and the encouragement to publish this volume.
Finally, lowe a great debt to my wife Irene for her patience, support
and confidence while I was doing the research for, and writing, the book.
Contents
1. Introduction 1
1 .1. European unemployment and the mismatch hypothesis 1
1.2. The conceptual framework followed in this book 5
1.3. Overview and results 7
2. Do aggregate measures of mismatch measure mismatch?
A time series analysis .of existing concepts 11
2.1. Introduction 11
2.2. Some puzzling evidence 12
2.3. Measuring mismatch: Theoretical foundations 18
2.4. Measurement problems 24
2.5. Disaggregation and unobserved heterogeneity 27
2.6. Time series analysis 29
2.7. Testing for unit roots 31
2.8. On the magnitude of drifts in macroeconomic
mismatch time series 38
2.9. Some simulation experiments 41
2.10. Concluding remarks 43
Appendix A2 45
3. Disaggregate matching functions, spurious mismatch
and occupational reallocation in Germany 55
3.1. Introduction 55
3.2. Aggregate matching functions: Theoretical framework 58
3.3. Aggregate matching functions in West Germany 62
3.4. Spurious matching functions 70
3.4.1. The econometric theory of spurious 70
matching functions
3.4.2. Simulated evidence 71
3.5. Disaggregate matching functions using a panel
of occupational groups 77
3.5.1. Occupational UV-curves 77
3.5.2. Nonsense regressions with panel data? 79
3.5.3. Panel data estimations for disaggregate
matching functions 80
x
3.5.4. Substituting the time trend by economic
variables 84
3.5.5. Period effects and the identification
of mismatch 84
3.6. On occupational reallocation: Theoretical and
empirical aspects 92
3.6.1. Matching functions and the adjustment of
unemployment/vacancy ratios 92
3.6.2. Empirical evidence 94
3.7. Understanding the matching of apprentices 99
3.7.1. The economic problem 99
3.7.2. Towards a reduced-form-matching function
for apprentices 100
3.7.3. Panel estimations 102
3.7.4. Backward-looking behaviour and future
rigidities 106
3.8. Concluding remarks 107
Appendix A3 111
A3.1. Data 111
A3.11. Spurious regressions 113
A3.1I1. List of occupational groups 133
A3.IV. Panel data modelling 135
4. Matching and new technologies: Does unmeasured ability
explain the higher wages of new-technology workers? 139
4.1. Introduction 139
4.2. Matching, mobility, and unmeasured ability 141
4.3. The micro datasets: Presentation and
descriptive analysis 145
4.3.1. INSEE data sources 145
4.3.2. The definition of "new technology"
categories 146
4.3.3. "New technologies" and "organization
of the work place" 149
4.3.4. Variables representing the firm-level
background of individual workers 152
4.4. Cross-sectional results 153
4.4.1. Specifying the wage equation 153
4.4.2. Some theoretical and empirical reasons
to include firm-level variables 154
4.4.3. The impact of new technologies on wages:
Global results 156
4.4.4. The impact of new technologies on
occupational wages 161
XI
4.4.5. Mismatch related to new-technology use 162
4.5. Wages and new technologies: Evidence from panel
data 167
4.5.1. Construction of panel data 167
4.5.2. The impact of new technologies on wages:
Fixed-effect modelling 168
4.6. Concluding remarks 171
Appendix A4 172
A4.1. Descriptive statistics 172
A4.11. Definition of educational degrees 179
A4.1I1. Additional cross-sectional results 180
5. Conclusions 191
6. References 197
Mismatch Explanations of European
Unemployment
A Critical Evaluation
1. Introduction
1.1. European unemployment and the mismatch hypothesis
Relatively high growth rates of GDP make it difficult to explain the high
European unemployment rates within the usual business cycle framework.
Over the four year period 1987-90, for instance, real GDP increased by
13 % and the unemployment rate declined from 10.7 % in 1986 to 8.3%
in 1990 for EC12. High unemployment rates remained despite an average
growth rate of output of 3.4%. The persistence of European unemploy
ment stands in striking contrast to the cyclical pattern of unemployment
in the United States. Many people attribute the rise in European unem
ployment to increased imbalances between the pattern of labour demand
and supply - in other words, to greater mismatch.
In many countries, the increase in unemployment through the mid-1980s
was very large indeed. The OECD-standardised unemployment rate for
Germany, for example, rose from an average of 1.1 % over the 1967-74
period to 8.6% in 1984. Comparable numbers show an increase from 3.4
to 13.2 in the U.K, from 5.6 to 10.2 in Italy, and from 2.7 to 20.1 in
Spain. The studies prepared for the first Chelwood Gate conference,
collected in The Rise in Unemployment (Bean et aI., 1986), analyse the
contribution of real wages and demand deficiencies to the increase of
unemployment after the first oil price shock in 1973. In the late eighties,
however, the persistence of high unemployment over time became the
main issue. The second Chelwood Gate conference focused on this topic.
Analysing the role of capital constraints and insider wage setting in
generating persistence, the common findings across countries in the latter
conference, as summarised by Dreze and Bean (1990), show that growing
unemployment was accompanied by a growing imbalance between labour
supply, capacity-determined employment and demand-determined
employment.