ESSAYS ON THE RISE OF UNEMPLOYMENT IN EUROPE

This thesis is a collection of essays that investigate different macroeconomic aspects of the dramatic rise in European unemployment rates over the past fifteen years. The first essay reviews existing research on the subject and adduces evidence that the secular rise of unemployment rates in Europe represents largely movement in the equilibrium rate of unemployment, or NAIRU. Chapter 2 examines the time series behavior of manufacturing employment in Europe in the framework of a monopolistically competitive representative firm facing costs of adjusting labor input. While there is little evidence of significantly higher quadratic adjustment costs in Europe, the overidentifying restrictions are not rejected for most European economies. We interpret these findings as well as low covariance of estimated residuals across these countries as implying the absence of operative sales constraints on firms. Chapter 3 analyzes the behavior of a trade union that allocates employment among its members on the basis of seniority. In a dynamic setting, this model implies "hysteresis," or lack of mean-reverting behavior in employment. Some weak implications of the model for the time series are tested; we find evidence of hysteresis only in the Federal Republic of Germany. Chapter 4 integrates the q-theory of investment with a monopoly union model of wage determination to account for breaks in the trend growth rates of European manufacturing capital stocks over the last decade. In this framework, permanent terms of trade movements can induce permanent changes in equilibrium levels of capital and employment. Estimated breaks in the time series behavior of aggregate European manufacturing capital stocks are consistent with predictions of the model. Chapter 5, which represents joint research with Jeffrey Sachs, investigates some of the reasons for the secular rise of unemployment in the Federal Republic of Germany, the most significant West European economy. After reviewing institutional details of the labor market in Germany, we identify various impediments to the kinds of structural adjustment that have operated to maintain a fairly constant equilibrium rate of unemployment in the United States.