exogenous variables contributed to the trajectory of the unemployment rate during the
booming period of the second half of the 80’s, and the recession years of the early 90’s.38
First, we capture the unemployment effects of the changes of a given exogenous vari-
able, say x, over the 1985-1991 period by keeping it constant at its 1985 level throughout
the booming years and dynamically solving the resulting model. The simulated series
represents the trajectory of the unemployment rate in the absence of any changes in x
after 1985, and in the presence of all other shocks during that period.39
Figures 4a-4f plot the actual and simulated series. The distance between the two series
reflects the contributions of each of the exogenous variable to the unemployment rate over
the 1985 -1991 period.
Investment (i.e. the growth rate of capital stock) and oil prices were the main driving
forces of the downward trend in unemployment during the boom period. By 1991, the
contribution of investment amounted to approximately 7 (9) percentage points, pp, de-
crease in the unemployment rate of the high (low) unemployment regions. The reduction
of oil prices after the mid eighties also contributed to the decrease of unemployment by 7
(11) pp in the high (low) unemployment regions.
Benefits contributed by increasing unemployment 4 (1) pp in the high (low) group of
regions. Taxes were responsible for an increase of no more than 1 pp in the unemployment
rate of all regions, while import prices put an upward pressure on unemployment of around
2 pp. Finally, the contribution of working age population growth was negligible in the
low unemployment regions and a decrease of less than 2 pp in the high unemployment
regions.
Figures 5a-5f present the unemployment contributions of the exogenous variables over
the recession years of the first half of the 90’s.
The changes in investment over the 1991-1995 period put an upward pressure on
unemployment. The unemployment contribution of investment was 9 (4) pp increase in
the unemployment rate of the high (low) group of regions. It is worthwhile to note the
asymmetry of the relative unemployment rate gains and losses of the two groups during
the boom and recession periods. In the boom years 1985-1991, the high unemployment
rate group benefited by 22% less than the low unemployment group of regions. In the
recession years 1991-1995, the high unemployment regions were hit by more than twice
as much as the low unemployment regions.
As expected, the unemployment contributions of oil prices were minimal after 1991
when oil prices stabilised at relatively low levels. The effects of benefits and taxes were
quite small, the impact of competitiveness was negligible, while the growth of working
age population led to an unemployment rate increase of 2 pp in all regions.
The above discussion shows that capital stock (investment) and oil prices have a
38 Figure A in the Appendix gives the plots of the exogenous variables.
39It is important to note that this is simply a dynamic accounting exercise, answering the question:
how much of the movement in unemployment can be accounted for by the movements in each of the
exogenous variables. It does not tell us what would happen to unemployment if the exogenous variables
followed different trajectories, because in that event agents may change their behavior patterns and thus
the parameters of our behavioral equations may change (in accordance with the Lucas critique).
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