WP/15/5

Youth Unemployment in Advanced Europe:

Okun’s Law and Beyond
Angana Banerji, Huidan Lin, and Sergejs Saksonovs
© 2015 International Monetary Fund WP/15/5

IMF Working Paper

European Department

Youth Unemployment in Advanced Europe: Okun’s Law and Beyond

Prepared by Angana Banerji, Huidan Lin, and Sergejs Saksonovs

Authorized for distribution by Petya Koeva Brooks

January 2015

This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily
represent those of the IMF or IMF policy. Working Papers describe research in progress by the
author(s) and are published to elicit comments and to further debate.

Abstract

The crisis has intensified what was previously a chronic unemployment problem in Europe;
youth unemployment is now at unprecedented highs in some European countries. This paper
assesses the main drivers of youth unemployment in Europe. It finds that much of the
increase in youth unemployment rates during the crisis can be explained by output dynamics
and the greater sensitivity of youth unemployment to economic activity than adult
unemployment. Labor market institutions also play a significant role in explaining the
persistently high levels of youth unemployment, especially the tax wedge, minimum wages
relative to the median wage, spending on active labor market policies, the opportunity cost of
working (measured by the unemployment benefits), vocational training, and labor market
duality. This suggests that policies to address youth unemployment should be comprehensive
and country-specific, focused on reviving growth and advancing labor market reforms.

JEL Classification Numbers: E24, J21, J20

Keywords: Youth employment, youth unemployment, Okun’s law, business cycle, labor
market factors

Author’s E-Mail Addresses: ABanerji@imf.org; HLin@imf.org; SSaksonovs@imf.org

 3

Contents Page

I. Introduction ............................................................................................................................4

II. Stylized Facts ........................................................................................................................6

III. Data and Methodology .........................................................................................................8

A. Variable Selection and Data Coverage .....................................................................8
B. Methodology ...........................................................................................................11

IV. Empirical Results ...............................................................................................................14

A. Estimating the Okun’s Coefficient ..........................................................................15
B. Estimating the Role of Labor Market Features .......................................................18
C. The Role of Product Market Reforms .....................................................................21

V. Conclusions .........................................................................................................................22

Tables

1. Data Definitions ...................................................................................................................28

2. Okun’s Law Estimates .........................................................................................................29
3. Okun’s Law: Decomposition of Expenditure Components .................................................30
4. Multivariate Model Estimates ..............................................................................................31
5. Univariate Model Estimates without Interaction Term .......................................................32
6. Univariate Model Estimates with Interaction Term.............................................................33

Figures

1. Labor and Product Market Institutions ................................................................................35

2. Marginal Impacts of Labor Market Institutions on Unemployment Rates ..........................37

Box

1. SMEs: Financing Constraints and Youth Unemployment ...................................................16

References ................................................................................................................................24
 4

I. INTRODUCTION1

Youth unemployment has surged in Europe during the global crisis, and is at historic highs in
many countries. Several papers have highlighted the deleterious consequences of high youth
unemployment. These include the impact of “scarring” that leads to a lower probability of
future employment and/or lower wages, which has been found to be persistent (Dao and
Loungani, 2010; Ellwood, 1982; Gregg and Tominey, 2005; Kahn, 2010; Oreopoulos et al.,
2012). High levels of youth unemployment have been shown to erode social cohesion and
institutions (Giuliano and Spilimbergo, 2009; Altindag and Mocan, 2010; ILO, 2013), and
foster crime (Fougère et al., 2009; Carmichael and Ward, 2001). In addition, young
unemployed workers may have a higher propensity to relocate abroad because of lower
“sunk costs” and greater potential for education and, subsequently, work abroad.2 The
outward migration of the youth combined with the general ageing of the population may
lower the potential output of the euro area since a significant share of the outward migration
is to countries outside the euro area (OECD, 2013a). High youth unemployment and an
outward migration of younger members of the workforce could also undermine the
sustainability of spending on social safety nets in euro area countries, which is of particular
concern given their demographic challenges.

In response, specific policies have been formulated at both the European Union (European
Commission, 2012 and 2013a) and national levels to deal with youth unemployment. The
most notable examples are the EU’s Youth Guarantee Scheme, aimed at ensuring that all
young people get a job offer within four months of leaving formal education or becoming
unemployed, and the Youth Employment Imitative, aimed at supporting active labor market
policies for young people not in education, employment or training in regions with high
youth unemployment. Policies at the national level include, for instance, Italy’s July 2013
measures to support youth unemployment, including tax breaks for employers hiring
under-30s on permanent contracts, and the increase in training, apprenticeship and internship
schemes. Such policies aim to smooth the job-searching process and promote youth
employment.

But what drives youth unemployment? Despite the focus on the harmful effects of pervasive
youth unemployment and policies to address the problem, studies devoted to understanding
the main drivers of youth unemployment are relatively limited. The large literature on labor
1
We are grateful to Petya Koeva Brooks for her guidance on the project. We would also like to thank Shekhar
Aiyar, Céline Allard, Larry Ball, Helge Berger, Olivier Blanchard, Rodolphe Blavy, John Bluedorn, Jӧrg
Decressin, Prakash Loungani, Paulo Medas, Mahmood Pradhan, and other IMF colleagues, and seminar
participants at the European Commission and the European Central Bank for their insightful comments. We are
grateful to Xiaobo Shao and Katherine Cincotta for their excellent assistance with research and document
preparation respectively.
2
For example, there is evidence that Latvian emigrants during the crisis were slightly younger and slightly more
educated than the average population (Hazans, 2011, Blanchard et al., 2013). Arpaia et al. (2014) show that a
quarter of immigrants are in the age group of 15–24 years old, and 40 percent are in the age group of
15-29 years old.
 5

markets usually examines overall unemployment, which has also been an important concern
during the global crisis.

The few papers that do investigate youth unemployment and employment in advanced
economies all point to the important role of economic activity and labor market institutions.
Some find significant effects from multiple factors—including labor market reforms,
economic freedom, education, part-time employment, and active labor market policies
(Choudhry et al., 2012a). Others highlight the role of individual labor market institutions
such as the union involvement in wage setting (Jimeno and Rodriguez-Palenzuela, 2002;
Bertola et al., 2007), labor market flexibility (Bernal-Verdugo et al., 2012a), or employment
protection legislation (Bassanini and Duval, 2006) for youth labor market outcomes.

Our paper examines the main cyclical and structural explanatory factors behind the youth
unemployment dynamics during the global crisis. It covers 22 advanced European
countries—18 in the euro area, as well as Denmark, Sweden, Norway and the United
Kingdom, but the discussion places a special emphasis on the euro area. The sample period is
from 1980 to 2012, with the actual size subject to data availability, in particular for labor
market features.

The paper makes several contributions to the empirical literature. First, our analysis
compares and contrasts the effects of various factors on both youth and adult unemployment,
and the changes and levels of the unemployment rate. Second, our methodology allows us to
take fuller account of output fluctuations on youth unemployment. Like many other studies
on similar issues, we also utilize panel data to control for unobserved time-specific or
country-specific characteristics. However, unlike these studies which assume that output
fluctuations have a common effect across countries, we estimate the country-specific
sensitivity of unemployment to output fluctuations and also control for such country-specific
output-sensitivity when studying the role of labor market institutions. There is evidence that
the sensitivity of unemployment to output varies significantly across countries (e.g., Ball et
al., 2013).

Moreover, this paper investigates examines whether labor market factors amplify or dampen
the sensitivity of unemployment to output fluctuations in each country. In the context of the
current crisis, a few papers have studied how financial crises affect youth and how labor
market institutions affect the reaction of youth unemployment to crisis (e.g., Choudhry et al.,
2012b). However, they mainly focus on recessions (rather than output fluctuations in general)
and only incorporate select labor market factors into the analysis (e.g., labor market
flexibility in Bernal-Verdugo et al., 2012b, and employment protection legislation,
O’Higgins, 2012). Our paper covers a broad range of labor market institutions that affect
both labor demand and supply. Also, it looks at how each of a broad set of labor market
factors affect the sensitivity of youth unemployment rates to the output gap, including during
 6

downturns. We do so by introducing an interaction term of output gaps and labor market

institutions.

The results suggest that youth unemployment rates are more sensitive to output fluctuations
than adult unemployment, and the significant increase in youth unemployment during the
crisis, especially in vulnerable euro area economies, was largely due to the decline in
economic activity. In addition, the persistently high levels of youth unemployment could be
also explained by a host of labor market institutions, including: the opportunity cost of
working (measured by the unemployment benefits), labor costs (measured by the tax wedge
and minimum wage relative to the median wage), spending on active labor market policies
(ALMPs), vocational training, and labor market duality. Finally, labor market features do not
generally affect the sensitivity of youth unemployment to output gaps.

The remainder of the paper is structured as follows: Section II documents stylized facts about
labor market dynamics in advanced European countries. Section III describes empirical
methodology and data. Section IV summarizes the empirical results, and, finally, Section V
concludes.

II. STYLIZED FACTS

The crisis has left a sizable dent in euro area output and investment, which dropped by 2 and
19 percent respectively since their pre-crisis peak. The hardest hit sectors were construction,
retail and wholesale sectors, and manufacturing, with sectoral output lower than their
pre-crisis peaks by 20 percent, 5 percent, and 4 percent, respectively.

Labor market outcomes have been dismal: about 4 million jobs were lost across the advanced
Europe during this time period, with 25
Euro Area: Unemployment Rates and NEET
unemployment rates—youth unemployment in 23 (Percent)
3
particular—rising to unprecedented levels. The Youth
21
crisis has reversed a decade-long trend of modest Adult
19 Youth NEET
declines in youth unemployment—the youth
17
unemployment rate in the euro area remains
15
elevated at 24 percent in mid-2014, well above
13
the 15 percent rate in 2007. The adult
11
unemployment rate has also risen significantly,
9
but less so than youth unemployment
7
(10¼ percent in mid-2014, from 6½ percent in
2007). The higher youth unemployment rate 5
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
only partly reflects the fact that the youth labor Source: Eurostat
force is typically smaller than the adult labor
3
Henceforth, youth refers to individuals aged 15–24 years, and adults refer to individuals aged 25–64 years.
Unemployment refers to the unemployment rate.
 7

force; the gap between youth and adult unemployment rates has increased significantly after
the crisis.4 The NEET rate, defined as the share of the youth population that is not employed
or involved in further education or training, is less influenced by measurement biases
inherent in determining the size of the youth labor force. Even the NEET rates show that the
mild improvements that had started before the crisis have now been reversed.

Across the euro area, there are large cross-country differences in the level and change in
youth unemployment, and these differences have increased during the crisis. The current
unemployment situation reflects a complex mix of developments during the crisis, combined
with a variety of pre-crisis unemployment rates. Taking these differences into account, euro
area countries can be placed into four buckets: (i) those that witnessed large increases in the
youth unemployment during the crisis from relatively low pre-crisis levels (Ireland, Cyprus);
(ii) those with above-average unemployment rates before the crisis, but small increases since
the crisis (Belgium, France, Finland and Sweden); (iii) those with the worst of both of the
above categories—large increases in youth unemployment after the crisis, but relatively high
rates to begin with (Greece, Spain, and Italy); and, (iv) those with the best of both worlds
(Austria, Netherlands, Germany), with small increases in unemployment (or even a decline in
the case of Germany) on top of low pre-crisis unemployment rates to begin with.

Youth employment conditions are fragile, tenuous and concentrated. The young are far more
likely to be hired on temporary contracts than adults in all countries, but particularly in
Spain, Italy and Portugal, countries which 80
experienced some of the largest increases Share of temporary employment, 2013, percent
70
in youth unemployment during the crisis. Youth Adult
60
Youth employment is also concentrated in
sectors which tend to be more sensitive to 50
the business cycle: manufacturing, 40
wholesale and retail trade, and hotels and
30
restaurants. Before the crisis, these sectors
comprised 65–75 percent of youth 20

employment in countries where youth 10

unemployment increased the most after the 0
ESP

GRC

DNK
DEU

EST
ITA
FIN

LUX

SVK
SVN

SWE

IRL

CYP
FRA

BEL
PRT

AUT

LVA
MLT
GBR
NLD

NOR

global crisis. In the aftermath of the crisis,

the top three sectors below together still Sources: Eurostat
employed on average 50 percent of the

4
The youth labor force tends to be smaller than that for other age cohorts because young individuals may
choose to pursue full-time education, although participation in education does not necessarily exclude
participation in the labor force (e.g., part-time work or apprenticeships). The youth labor market is also
characterized by frequent search and matching as individuals look for better jobs, using intermediate stages for
accumulating experience (and perhaps, occasionally, dropping out of the labor force).
 8

youth and 40 percent of adults. As of 2013, wholesale and retail trade was the dominant
sector for youth employment, followed by manufacturing and accommodation and food
services.5

100 60
Youth Employment By Sector, Share of employment in top 3 areas of economic
90 2000-07, percent activity, 2013, percent
Construction, Real Estate Manufacturing 55
80 Youth Adult
Wholesale, Retail Trade Hotels and Restaurants
70 50
60
45
50

40 40
30
35
20

10
30

SVK
SVN
IRL

CYP

BEL
AUT
PRT

LVA

FRA
GRC

MLT
GBR
DNK

ESP
ITA

EST
DEU

NLD
NOR

LUX
FIN

SWE
0
CYP ESP GRE IRE ITA POR
Source: Eurostat

III. DATA AND METHODOLOGY

A. Variable Selection and Data Coverage

Measure. In line with the literature, this paper uses the unemployment rate as a main measure
of youth and adult unemployment. This enables us to exploit existing theoretical frameworks
for our analysis, and allows easier comparison with the literature. Some have argued that the
unemployment rate is not informative and is a biased measure of the incidence of
unemployment given the smaller and more volatile size of the youth labor force. But other
measures also come with their own challenges.

Alternative measures. Other unemployment indicators—the NEET rate or the unemployment

ratio6—can be problematic to use. First, it is challenging to construct the appropriate
analytical framework that could allow these measures to be used for empirical analysis,
which is, perhaps, also why they are seldom used in the literature. Second, these indicators
pose statistical challenges. The NEET rate does not allow for a comparison with adult
unemployment as it is only defined for the 15–34 years old age group. The definition of
NEET varies across countries,7 making cross-country comparisons difficult. As for the

5
Top areas of economic activity for adults vary more by country. The dominant ones are human health and
social work activities, wholesale and retail trade as well as manufacturing.
6
The unemployment ratio is defined as the unemployed as a share of total population.
7
The NEET referred to in this paper is the definition adopted in most European countries (Eurofound, 2012). In
the United Kingdom (Coles et al., 2002; McGregor et al., 2006) and in New Zealand (Hill, 2003), the NEET
mainly capture teenagers. The Japanese definition of NEET refers to people aged 15–34 years old who are not
in the labor force, not attending school and not housekeeping (OECD, 2008a), while in Korea NEET refers to
(continued…)
 9

unemployment ratio, it is perhaps as biased as the unemployment rate—both indicators

ignore considerations such as: the unemployed not joining the labor force and remaining in
education because they could not find a job, or returning to university to avoid a potentially
scarring unemployment spell, even though they would have preferred to work; those without
a job who are not registered as unemployed; or, those that migrate abroad to study and work.
Moreover, the unemployment rates and ratios are closely correlated (with a correlation
coefficient of 0.89), suggesting that using one over the other is unlikely to fundamentally
change any conclusions regarding the dynamics of youth unemployment.

Measurement of labor market factors. For robustness, a number of different measures are
used for each of the following categories of labor market features— labor costs; the
opportunity cost of working; collective bargaining; labor market duality; education and
training; and spending on ALMPs. In each category, the analysis relied on several indicators
and different sources (see Table 1 for definitions). For instance, labor costs were measured
by the tax wedge and the ratio of the minimum wage to the median wage under the
assumption that the former was most relevant for the youth. Several countries in the euro area
do not have minimum wages and this ratio was set to zero in the data base. Similarly, the
opportunity costs of employment are measured by gross benefit replacements rates, net
replacement rates (benefit replacement rates net of taxes) and “the inactivity trap” which
arises when tax and benefit systems interact to reduce the financial incentive of individuals
who qualify for social protection benefits to work.

Data challenges. There are several constraints. Some arise from the challenges inherent in
capturing the structural characteristics of labor markets in a manner that captures
country-specific institutional context. Others arise from the need to measure labor market
factors consistently across a broad range of countries and over a long period of time to
maximize the sample size.

 Sample size. Data on the selected labor market institutions is usually not available for the
full sample period, and is especially limited for new entrants to the euro area. The smaller
sample size implies that country-by-country empirical analysis combining the
institutional variables and measures of the business cycle together would not yield robust
results. For instance, the data series for some variables (e.g., ALMPs) starts from late
1990s for most countries, and even later for smaller countries; some variables (e.g.,
OECD’s index for employment protection legislation) are missing in some countries, and
other series (e.g., tax wedge) only start from early 2000’s for all countries. This cuts the
total sample size significantly, and in some cases, we have to use fewer variables than
preferred.

people aged 15-34 years who have left school, are not preparing to enter a company, do not have a job, do not
have family responsibilities (or children) and are not married (OECD, 2008b).
 10

 Duration of the analysis. Given the long lags in data availability, it is difficult to extend
the analysis beyond 2012 at this juncture since only a subset of the labor market variables
is available. Thus, labor market reforms since the crisis are not fully captured in the
dataset, e.g., Spain’s major labor market reforms of 2012 (Ley 3/2012 de medidas
urgentes para la reforma del Mercado laboral) which included reforms to collective
bargaining, opt-outs and firm level internal flexibility regarding working conditions
(wages, hours), and dismissals (conditions, costs).

 Measurement and relevance. The analysis had to use data series that were available for a
large set of countries over a long period of time. But some of these variables are not
always relevant for the young
unemployed (e.g., the unemployment 90
Reason for Temporary Work Contract Among
benefit system), nor do they capture the 80 Youth, percent of unemployed, 2012
country-specific institutional context that 70

may be driving unemployment. Some 60 In Education or Training

variables only partially capture the 50 Probationary Period

elements that might have an impact on 40

unemployment. For example, the 30
OECD’s indicator on union density 20
measures the incidence of unionization 10
among the employed, but does not 0
measure the degree of centralization or EA IRE GRE ESP POR CYP FRA ITA NET BEL AUS GER
17
the coverage of unions. Another example Source: Eurostat
is measuring the skill levels of Note: missing red dot indicates missing data.

unemployed workers. The level of formal

education may not provide a complete picture of a worker’s skills; vocational training
and apprenticeships are also important but are difficult to measure. The analysis was
based thus on both measures of skills, and survey data on the reasons for temporary work
contracts was used as a proxy for the incidence of vocational training. Last but not least,
product market flexibility was measured using the Global Competitiveness Index, but this
index includes components such as the intensity of local competition, extent of market
dominance and anti-monopoly policy, whose effect on unemployment rates may be
ambiguous.8 On the other hand, alternative measures such as the progress in reducing the
cost of starting a business according to the World Bank Doing Business indicators is less
comprehensive.

 Slow moving. Finally, by their very nature to some extent, structural variables change
very slowly from year to year, which makes it difficult to study the impact of reforms on

8
The OECD’s Product Market Reform indicator is only available every five years. We therefore focus on the
Goods Market Efficiency: Competition sub-indicator compiled from the Global Competitiveness Report and the
cost of starting a business from the World Bank Doing Business Indicators.
 11

labor market dynamics. Also, labor and product market features have remained relatively
unchanged since 2000 for many of the countries in the sample (Figure 1) because of lack
of major reforms in several countries, regardless of which indicator is used. In general,
these indicators seem to have remained broadly the same or even deteriorated in countries
that have witnessed the highest levels and the biggest increases in youth unemployment.
Germany and the Scandinavian countries are among the few that have registered
improvements.

B. Methodology

There were several methodological constraints. These limitations arose as a result of the data
challenges discussed in the previous section and the uncertainties involved in estimating
equilibrium values of potential output and unemployment. As a result, the specifications
considered below did not take into account non-linear and lagged effects of output and labor
market indicators. In addition, significant simplifying assumptions had to be made about the
country-specific effects of labor market features.

Okun’s Law estimation

The Okun’s Law, proposed by Arthur Okun in 1962, is the empirical regularity that changes
in unemployment rates and output growth are negatively related.9 Many studies confirm this
relationship for overall unemployment but research on youth unemployment is less common.
Some authors highlight the higher sensitivity of youth unemployment to the business cycle
(OECD, 2006; Scarpetta, 1996; Scarpetta et al., 2010; and European Commission, 2013b).

Standard specification. The Okun’s coefficient for individual countries is estimated on the
basis of the following specification, where is the estimated value of the Okun’s
coefficient for country i (Table 2):

− where is the change in youth or adult unemployment rates in country i, year t

− is the dummy variable for country i (other than for country 1 to avoid perfect
collinearity)

− is output growth, and,

9
See Ball et al. (2013) for an extensive discussion on this topic and theoretical derivation of the reduced form
relationships in (1) and (1a).
 12

− is the error term with standard assumptions.

Alternative specification. We also consider an alternative specification using the output gap
and deviation from natural rates of unemployment , respectively, as
independent and dependent variables. is the Okun’s coefficient in this model (with
estimates provided in Table 2):

Ball et al. (2013) argue in favor of the specification (1a) on the grounds that specification
(1) is only theoretically valid if one is willing to assume a constant equilibrium
unemployment rate as well as constant potential growth. However, estimating the output gap
and deviation from structural unemployment in specification (1a) is difficult. We use output
gap estimates from the IMF’s World Economic Outlook database and apply the HP filter
(with a smoothing parameter of 100) to get the natural rate of unemployment. The HP filter
suffers from the well-known problems of unreliability at the end of the sample, and using
output gap measurement from WEO allows us to sidestep this problem somewhat for
potential output, but not for the natural rates of unemployment. Therefore, the specification
in differences in equation (1) is our referred method for estimating the Okun’s coefficient.

Disaggregation. The idea of disaggregating the Okun’s Law specification into the impact of
various expenditure components was proposed in Anderton et al. (2014), which, however,
did not differentiate between youth and adult unemployment. We apply this methodology as
well to see which component of growth—consumption, investment and exports—has the
largest effect on unemployment. For practical purposes, this involves replacing
growth of various expenditure components (namely, growth in
consumption, investment and exports). The results are listed in Table 3.

The role of labor market institutions

Due to the previously discussed data challenges, it is not feasible to estimate country-specific
effects of several labor market factors simultaneously, while also allowing for individual
country effects of the business cycle (measured by the output gap). As a result, this paper
considers two model specifications.

Multivariate approach. This specification considers the effect of several labor market
features (and output gap) simultaneously, but restricts their impact to be the same across
countries, while allowing the impact of the business cycle to vary across countries. More
formally, the specification for the multivariate approach is given by the following model with
the estimates provided in Table 4:
 13

− where is the level of the youth or adult unemployment rate,

− is the dummy variable equal to 1, if dependent variable is from country i,

− is the output gap, and

− represents labor market institution j, in country i, year t.

Univariate approach. An important drawback of the multivariate specification (equation

(2) above) is the reduction in sample size as additional labor market variables are added to
the list of x. To circumvent this limitation, equation (2) was also estimated for each labor
market feature individually. The results of this approach are listed Table 5.

Univariate approach with interaction term. The trade-off between maximizing the sample
size and incorporating variable effects of labor market factors in each country also motivates
our second univariate approach.

This approach also considers the impact of one labor market feature at a time but allows its
impact to vary across countries via its interaction with the business cycle. We consider the
following specification, with the same notations as in (2):

This specification includes one additional term—the interaction of the labor market variable
institutional variable, output gap, and the country dummy. It is based on the assumption that
(i) labor market features may affect the way unemployment rates responds to the business
cycle, and this impact may vary across countries; and the simplifying assumption that (ii) the
effect of the labor market factor remains the same across countries, except indirectly via its
impact on the business cycle.

From equation (3), the marginal impact of the change in labor market feature on the level
of unemployment is given by the partial derivative:

),

Thus, the impact of a change in any labor market feature differs across countries. Crucially,
the marginal effects of a unit change in variable labor market factor will then depend on the
value of the output gap at which they are evaluated. This point is calculated at the
 14

country-specific average output gap during the sample period. The standard errors for the
marginal effects are computed using the delta method. The results of this approach are
summarized in Figure 2.

Robustness check. A variety of additional specifications were considered, e.g., using the total
unemployment rate and employment rates for different age groups as dependent variables. In
addition, we have considered models with changes in labor market institutions as
independent variables and output growth instead of the output gap as the independent
variable, to mimic the standard Okun’s law formulation in (1) more closely.

Levels versus changes. Our preference ultimately lies with models that feature levels (not
changes) of unemployment rate as dependent variables. A number of theoretical models of
unemployment are consistent with using unemployment rate in levels as dependent variable
in reduced-form equations. For example, Nickell and Layard (1999) develop a wage
bargaining model with numerous identical firms, showing that equilibrium level of
unemployment rate will be decreasing in any exogenous factor that increases job separation
rate (represented in our case by the output gap), increases the search effectiveness of the
unemployed (represented by ALMPs), lowers the benefit replacement ratio, lowers the
strength of the workers in the wage bargain (union density) or raises the elasticity of product
demand facing the firm. The latter argument even suggests some scope for including
variables associated with product market regulation into unemployment equations. Other
examples of similar models include Scarpetta (1996) and Bassanini and Duval (2006), who
estimate a specification very similar to ours.10

IV. EMPIRICAL RESULTS

This section discusses the main results from the various specifications described in Section
III. Some of these results need to be interpreted with caution given the methodological and
data constraints already discussed. Moreover, it would be important to remember that these
results do not measure the impact of the reforms undertaken in countries after the crisis as
they fall outside the sample period. Some results are counterintuitive and difficult to explain
without additional granular information about other relevant and country-specific factors.

10
Bassanini and Duval (2006) estimate a reduced-form equation consistent with a variety of theoretical models
of labor market equilibrium (job search, wage setting), where
unemployment is regressed on a series of structural variables (in vector X), an output gap measure (G), as well
as country and time fixed effects. We depart from this specification by including interaction terms and
excluding time fixed effects (equation 2).
 15

A. Estimating the Okun’s Coefficient

Standard Okun’s coefficient. We find unambiguous evidence validating the Okun’s law
across a wide range of countries. This is true regardless of how output fluctuations are
measured—by real GDP growth or the output gap. In equations (1) and (1a), cyclical factors
explain around 50 percent of the
0.2
variation in the changes in youth Euro Area: Okun's Law Coefficients /1
0.0
unemployment rates and around
-0.2
60 percent for adult unemployment rates
-0.4
across all advanced European countries,
-0.6
as measured by the R-squared (Table 2). -0.8
Youth unemployment is more sensitive -1.0
than adult unemployment in every -1.2
country, reflecting their relatively fragile -1.4
unemployment conditions. -1.6
-1.8
Youth Adults
Disaggregated Okun’s coefficient. In -2.0
order to find out which component of

NOR
ESP
EST

NLD
DEU

LUX
ITA

SVK
AUT

IRL
BEL

MLT
CYP

SVN
PRT

DNK

GBR
FIN
FRA

LVA
GRC

SWE
growth relates most to youth and adult
unemployment, the Okun’s law regression 1/ Shaded bars and circles reflect estimations that are not
significant.
(1) was generalized and estimated by using
growth rates of consumption, investment and exports as independent variables. The results
indicate that, for most countries in the sample, youth and adult unemployment rates are most
sensitive to consumption growth but much less sensitive to export growth in many countries

0.5 0.5
Elasticity of Youth Unemployment to GDP Components Elasticity of Adult Unemployment to GDP Components

0 0

-0.5 -0.5

-1 -1

-1.5 -1.5

-2 -2
SVK
SVN
IRL
BEL
CYP
AUT

FRA

LVA

PRT
MLT
GRC

ESP

GBR
DNK
DEU
EST

ITA

NLD

NOR
FIN

LUX

SWE

SVK
SVN
IRL
CYP
BEL

FRA

PRT
AUT

LVA

ESP

GBR
MLT
GRC

DNK
NLD
DEU

ITA
EST

NOR
FIN

LUX

SWE

Investment Consumption Exports Investment Consumption Exports

Sources: Eurostat; WEO; authors' estimates. Unfilled shapes indicate statisticially insignificant conefficients.
Sources: Eurostate WEO; authors’ estimates. Unfilled shapes indicate statistically insignificant coefficients.

(Table 3). This is broadly consistent with the findings by Anderton et al. (2014), which
argues that “this reflects the highly labor-intensive nature of the services that represent the
bulk of consumers’ expenditure, while the higher productivity manufacturing-related content
of exports tends to be less labor intensive.”
 16

Greater sensitivity of youth. All estimates of the Okun’s coefficient suggest that youth
unemployment is much more sensitive to the business cycle than adult unemployment. In
every country, the estimated Okun’s coefficient is, on average, two to three times as large for
the youth than for adults. It is partly because a smaller labor force means youth
unemployment rates necessarily react more sharply than adult unemployment rates to a
change in the GDP growth or output gap. However, it could also be explained by the greater
concentration of youth employment in cyclically sensitive industries and perhaps in small-
and medium-sized enterprises (SMEs) (Box 1).

Box 1. SMEs: Financing Constraints and Youth Unemployment

Small- and medium-sized enterprises (SMEs)11 employ the majority of the labor force in Europe, with the
employment share especially high in some stressed economies which experienced high increases in youth and
adult unemployment rates—more than
75 percent for Spain, Italy and Portugal, for 90
example. SMEs are usually more financially SME Share in Employment, percent
85 (Average, 2008-2013)
constrained than larger firms, particularly in
the current environment of financial 80
fragmentation and private sector deleveraging.
75
The Okun’s law framework is augmented with
financial constraints—measured as either the 70
share of firms in industry and services sectors 65
which report financial constraints as a factor
limiting production in surveys conducted by 60
the EC or the average share of SMEs in an
55
economy. The surveys do not list SMEs as a
separate category, but evidence from other 50
data sources, e.g. bank lending surveys,
suggests that they are more affected by 45

SVK
CYP

BEL
SVN

DNK

GBR
LVA
ESP

NOR
EST

SWE
NLD

DEU
LUX
ITA

AUT
IRL
PRT
MLT

FRA
GRC

FIN
financial constraints than larger firms.1
Greater financial constraints are associated Sources: European Commission; authors' calcuations
with higher youth unemployment.
 Controlling for country-specific fixed effects and output gap, an additional percentage point of firms
reporting financial constraints is associated with higher youth unemployment rates by 0.3 and 0.4
percentage points (for industrial and services sector respectively). The effect on adult unemployment rates
is smaller (0.2 percentage points).
 A 10-percentage-point increase in the average employment share in SMEs (or the SME share of value
added) lowers the Okun’s coefficient by 0.1, making unemployment more pro-cyclical.
1
There are data limitations. The average share of SME up to 2008 is used for each country because the data is available
only from 2008 and stays broadly constant. The percentage of firms reporting financial constraints is small (often zero)
and relatively unchanged, e.g., before the financial crisis only 2 percent of industrial firms reported financial constraints,
on average, compared to 2012–2013 when the average was 9.3 percent.

Cross-country variation. The Okun’s coefficient, i.e., the sensitivity of unemployment rates
to output fluctuations, varies across countries. Estimates range from not significantly

11
SMEs are defined as firms with less than 250 employees, turnover of less than 50 million euro or a balance
sheet less than 43 million euro.
 17

different from zero (e.g., Austria, Germany12) to -1.9 in Spain, i.e., a one-percentage-point
reduction in growth increases youth unemployment rates by almost 2 percentage points. The
ranking in the size of the Okun’s coefficient of the countries is consistent with the estimates
reported in Ball et al. (2013), who document the largest coefficient for Spain and the smallest
one for Austria.13

Intercept. The intercept in the Okun’s law equations (1) and (1a) also has an interesting
interpretation, which is sometimes overlooked. The intercept (including the fixed effect
component) would equal the change in unemployment rate when economic growth is zero.
Ball et al. (2013) point out that under the assumption of constant potential growth, the
intercept equals the product of minus the implied potential growth rate and the estimated
Okun’s law coefficient. In other words,

in equation (1)

Because the Okun’s law coefficient is empirically expected to be negative, this suggests that
the intercept in equation (1) should always be positive. The estimates in Table 2 confirm that
this is indeed the case. Intuitively, a positive intercept implies that if actual growth is zero,
while potential growth is positive, the unemployment rate is expected to increase because of
a wider output gap. High values of the intercept terms suggest greater difficulties in
sustainably reducing unemployment, or, put differently, a stronger growth is required to
prevent unemployment rates from rising. Spain has the highest Okun’s law intercept for
youth unemployment exceeding 5 percentage points, with intercepts for Cyprus, Estonia,
Greece, Ireland, Latvia, Portugal, Slovakia, and Sweden exceeding 2 percentage points. Only
for Austria, Germany, Netherlands, and Norway are intercepts not significantly different
from zero. On the other hand, the intercepts in equation (1a) (also including fixed effects) are
almost all insignificant with the exception of Latvia. This is also consistent with economic
theory—when output gap is zero, the deviation of unemployment rate from its natural level
should be zero as well.

Business cycle effects across specifications. How does the impact of the business cycle or the
output gap differ across specifications, i.e. between equation 1(a) which excludes the effect
of labor market factors, and (2) and (3) that includes labor market factors? The estimations
are not comparable because of very different sample sizes. The estimates of the Okun’s
coefficient according to equation 1(a) are based on 565 observations (Table 2). The output
gap coefficients in equation 2, on the other hand, are based on samples sizes that range from
99−160 observations (Table 4); these results are less robust and have therefore not been
reported in this paper to avoid confusion. It is therefore not meaningful to compare the results

12
Even in those cases, some studies have found that the Okun’s law holds for measures of hours worked. For
instance, instead of layoffs, German companies resorted to a decrease in average hours worked per worker
(Reisenbichler and Morgan, 2012).
13
Not surprisingly, the magnitudes differ somewhat from Ball et al. (2013) because our analysis focuses on
specific age groups of the unemployed.
 18

across specifications to derive the additional explanatory power from the inclusion of labor
market factors in the estimations, all the more so because of the simplifying assumption that
labor market factors have the same effect across all countries.

B. Estimating the Role of Labor Market Features

Output changes, on average, explain about 50 percent of the increase in youth unemployment
rates during the crisis, as shown in Table 2. Drawing on the labor market literature, this
section examines the role of other possible explanatory factors, in particular the structural
features of the labor market.

Empirical results. Changes in labor market variables were found to not be significant
explanatory factors for the increase in youth unemployment rates. The lack of a robust
relationship between labor market factors and changes in the unemployment rate could
simply reflect the empirical, specification and data challenges that have already been
discussed as well as the inability of the chosen labor market variables to capture country-
specific institutional details that may also be relevant in individual countries.

However, the results of the multivariate approach (equation (2)) suggest that a number of
labor market features are significantly associated with the levels of youth unemployment rate
(Table 4). In particular, lower labor costs (measured by the tax wedge and minimum wages
relative to the median wage) and higher spending on ALMPs, especially for training, are
associated with lower unemployment. Higher opportunity costs of working (measured by
gross and net benefit replacement rates) and stronger labor market duality (indicated by
higher shares of temporary workers and lower employment protection of temporary workers)
tend to raise unemployment, whereas collective bargaining (proxied by union density) has
mixed effects which are not robust.

Robustness. The above results are, by and large, confirmed by the univariate approaches as
well. However, there is a wide divergence in the range of estimates in part due to different
sample sizes used for the different estimations because of data constraints. Considering one
variable at a time allows the utilization of the whole sample for which data is available for
the regressor variable whereas in a multivariate specification the length of the sample is
determined by the sample size of the variable for which the data is least available. Thus, the
sample size can generally be much larger for the univariate estimations than for the
multivariate estimations. However, an important caveat to the results of the univariate
regressions is that they may be prone to omitted variable bias when there are significant
correlations among different labor market features which affect unemployment. Subsequent
references to the estimation of the impact of labor market features generally refer to the
multivariate specifications reported in Table 4, unless otherwise specified.

Greater hiring costs are associated with higher unemployment rates in the literature. Taxes
on employers and employees, together with high statutory minimum wage rates increase
 19

labor costs and reduce labor demand. Our results indicate that a one-percentage-point
increase in the tax wedge is associated with an increase in youth unemployment rates by
0.3-1.3 percentage points. The size of the correlation with adult unemployment is smaller
(around 0.4–0.5 percentage points). A one-percentage-point increase in minimum wages
(relative to median wages) is associated with an increase in youth unemployment by
0.4-1.2 percentage points, while the magnitude is smaller for adults. This is consistent with
the finding of OECD (2012) that since 2007 the young have on average been at a big
disadvantage in countries where the minimum wage is relatively high as a share of median
pay.14

Generous unemployment benefits can raise unemployment by reducing the willingness to

search for jobs and/or increasing the reservation wage to accept job offers.15 Our results
indicate that youth and adult unemployment rates tend to be higher when the opportunity
costs of working are high. A one-percentage-point increase in the gross replacement rates16 is
associated with higher youth unemployment by 0.4−0.5 percentage points and higher adult
unemployment rates by 0.1–0.2 percentage points.

An inactivity trap can arise through the interaction of tax and benefit systems. High social
protection benefits can reduce financial incentives to work because the combined effects of
increased tax payments and withdrawn income-tested benefits offset the potential gain in
disposable incomes from increased earnings. Higher inactivity trap is not significantly related
to unemployment when other labor market features are controlled for (Table 4), but is
associated with higher unemployment when investigated alone (Table 5).

Theoretically, labor market duality—a high share of temporary employment contracts

together with lower employment protection for the temporary workers—has an ambiguous
impact on unemployment. This is because stronger employment protection lowers not only
job separation rates by increasing the cost of firing, but also the job finding rate by increasing
the reluctance to hire workers in the first place. Our estimates suggest that a stronger labor
market duality can have a detrimental effect on the employment of young people. Higher
employment protection for temporary contracts is related with lower unemployment rates for
youth and adults, with stronger effects for the youth given their higher share of employment
on temporary contracts.17 A one-unit increase in the rating for employment protection

14
See also Bernal-Verdugo (2012a).
15
Young workers may not be entitled to full unemployment benefits given their short employment histories.
However, OECD (2006) finds a negative impact of generous unemployment benefits on youth employment that
is comparable in magnitude to other age cohorts.
16
We rely on the OECD gross replacement rate measure due to its availability for a longer period of time
(1983-2011, on a biannual basis).
17
These results are in line with some recent studies—labor market duality has been associated with lower youth
employment rate in a sample of 17 OECD countries over 1960–1996 (Bertola et al., 2007), and flexible labor
market is found to help improve youth labor market outcomes (OECD, 2006, and Choudhury et al., 2012a).
 20

legislation (EPL)18 is associated with a decline in youth unemployment rates by

2.5-5 percentage points and adult unemployment by 1.5–2 percentage points. A
one-percentage-point increase in the share of youth on temporary contracts is associated with
an increase in youth unemployment by 0.3–0.4 percentage points, but the relation with adult
unemployment rates is not statistically significant.

Overall, the role of higher union density is found to be unclear and not robust. A
one-percentage-point increase in union density could be associated with lower youth
unemployment rates by 0.2–0.6 percentage points under some specifications.19 However, this
finding is not robust to alternative specifications, including using different control variables
or allowing country-specific interactions. The results from specifications with employment as
dependent variable20 suggest that higher union density may be associated with an altered
employment composition, perhaps because employers prefer to hire the non-unionized youth
instead of the unionized adults in order to preserve the flexibility to adjust the work force as
needed, leading to higher employment for the youth and lower employment for adults.

Educational attainment tends to improve employability (OECD, 2013b). Vocational training

and expanded access to training could help make temporary jobs a stepping stone toward
open-ended contracts (OECD, 2004). Our results indicate that access to vocational training—
measured by the share of temporary workers under probation or vocational training—is
associated with lower youth unemployment by around 0.3 percentage points, but is not
statistically significant for adult unemployment. A higher share of individuals with low levels
of education has generally no significant effects on youth unemployment or employment
rates, but has a strong negative effect on adult unemployment and employment rates. Low
education may be less of an obstacle for youth employment, perhaps because young workers
can be more easily trained than adults.

Most empirical studies using macro-level data have found that ALMP spending, especially on
training, reduces total unemployment (OECD, 2006). We find that higher spending on
ALMPs, especially on training, is associated with reductions in both youth and adult
unemployment rates. An additional thousand euros per unemployed increase in ALMPs
spending is associated with lower youth and adult unemployment rates by around 0.3 and 0.1
percentage points respectively.21

18
The rating is on a scale from 1 (least protection) to 6.
19
This result is based on the OECD’s indicator on union density which measures the incidence of unionization
among the employed, but does not measure the degree of centralization.
20
Not reported in this paper, but available upon request.
21
However, micro-level studies find that the effectiveness of ALMPs varies, and that programs similar at
appearance can yield very different outcomes (e.g., Card, et al., 2010; Kluve, 2010). ALMPs need to be
designed and monitored properly as analysis of such programs shows that the impact and cost-effectiveness of
ALMPs vary significantly based on their design. Studies also show that ALMPs that target young people are not
(continued…)
 21

Impact on sensitivity to business cycle. Allowing for interactions between labor market
features and output fluctuations, as specified in equation (3), reveals significant cross-country
differences in the role of labor market features. The coefficient before the interaction term of
the output gap and the labor market variable would indicate the direction and magnitude of
such effect. Given that the Okun’s coefficient is negative, a negative (positive) coefficient
would imply that a particular labor market variable amplifies (dampens) the impact of the
business cycle on unemployment (Table 6). Our analysis, for the most part, finds only limited
evidence that labor market features change how youth unemployment responds to output
fluctuations. For instance, a higher tax wedge is found to amplify the impact of the business
cycle for Finland, Greece, Ireland, Slovakia and Spain, and dampen the impact for Denmark,
Sweden and the United Kingdom (column 5, Table 6). Similarly, total ALMP spending is
found to dampen the business cycle effect in Ireland, Slovakia, and Spain, but amplify the
impact in Finland, France, and Malta. Some of these results may seem counterintuitive and
cannot be properly explained without a detailed assessment of country-specific factors that
may be influencing the results but are not adequately captured in the model specification.

C. The Role of Product Market Reforms

Some authors have suggested that insufficient progress in other structural reforms—e.g.,
product market liberalization—is also an obstacle to facilitating greater youth employment
(see e.g. Nicoletti and Scarpetta, 2001). Picking the appropriate indicator for cross-country
comparison in this dimension was not easy (see Section III), and the chosen measure of
product market reform has important limitations. Thus, it is not surprising that we did not
find conclusive evidence of the link between these indicators and youth unemployment. For
the indicator “goods market efficiency” the estimated coefficient generally have the correct
signs, but the results are only significant in a few countries. The strongest effects are on adult
employment where higher goods market efficiency is associated with higher employment.
The results from using the “cost of doing business indicator” are counterintuitive, perhaps
because many countries have done reforms aimed at reducing the cost of starting a business
in the aftermath of the crisis, suggesting substantial endogeneity.

However, these results should not be construed as evidence against the importance of product
market reforms to facilitate entrepreneurship, but rather of data limitations. A suitable
indicator for measuring the ease of entrepreneurial activity on a cross-country basis is
needed, especially with regard to the ease of starting a new business.

very effective regardless of the type of the program. See “Youth Unemployment in Advanced Economies in
Europe: Searching for solutions,” IMF SDN14/11, Box 1.
 22

1.0 1.5
Ireland. Interaction Coefficients Italy. Interaction Coefficients
1.0
0.5
0.5

0.0
0.0
-0.5

-0.5 -1.0

-1.5
-1.0
-2.0

-2.5
-1.5
-3.0
Significant. Insignificant. Significant. Insignificant.
-2.0 -3.5

EPRT

TPROB
GRR

ITRAP

UDENSITY

LOWEDUC
EPRT
GRR

TPROB

NRR

TWEDGE
ITRAP

UDENSITY

MIN2MED
LOWEDUC

ALMPTOT
MIN2MED
NRR

TWEDGE

ALMPTRAIN
ALMPTOT

TSHARE
ALMPTRAIN
TSHARE

1.0 4.0
Greece. Interaction Coefficients Spain. Interaction Coefficients
0.8
3.0
0.6

0.4 2.0

0.2
1.0
0.0

-0.2 0.0

-0.4
-1.0
Significant Insignificant
-0.6
Significant. Insignificant.
-0.8 -2.0

EPRT

TPROB
GRR

ITRAP

UDENSITY

LOWEDUC
NRR

TWEDGE
MIN2MED
TPROB

ALMPTOT
GRR

UDENSITY

EPRT

LOWEDUC
ITRAP

ALMPTRAIN
NRR

TWEDGE

TSHARE
MIN2MED

ALMPTOT
TSHARE

ALMPTRAIN

Note: The data refers to the coefficients for the interaction between labor market features and the output gap.
Source: Authors’ estimates.

V. CONCLUSIONS

This paper documents labor market dynamics in advanced European countries, contrasting
developments in youth and adult labor markets. The analysis investigates the roles of growth
and labor market features in influencing both youth and adult unemployment rates. There is
considerable heterogeneity across countries in the levels and dynamics of youth
unemployment, labor market features and the responsiveness of the labor market to the
business cycle. Nevertheless, a few significant conclusions emerge.

Youth unemployment is more sensitive to economic growth than adult unemployment, and
the drop in economic activity during the global financial crisis explains the increase in
unemployment since 2007 to a large extent, especially in countries that experienced the
highest unemployment. The persistently high levels of unemployment across countries are
explained by both the output gap and a number of labor market features, such as the tax
 23

wedge, minimum wages relative to the median, spending on ALMP, and the generosity of
unemployment benefit systems, the availability of vocational training and the incidence of
labor market duality. As the economic recovery takes hold and unemployment rates return
closer to their historical averages, labor market institutions may play an increasingly large
role in influencing labor market dynamics.

The analytical approaches adopted in this paper have been limited by the availability of
comparable data across countries for a variety of structural reform indicators as well as
uncertainties regarding estimations of the output gap and the equilibrium rate of
unemployment. The results therefore may not reflect sufficient country-specific information,
nor do they include the non-linear and lagged effects of the explanatory variables; all this
could have a material effect on the unemployment outcome in a given country. Overcoming
these methodological and data limitations could be a productive avenue for future research.
Nevertheless, the cross-country evidence presented here can highlight systematic patterns of
cross-country divergence and serve as motivation for country-specific analysis. Achieving a
sustainable reduction in unemployment rates in a number of advanced European countries
will be an enormous challenge, suggesting that more analysis will continue to be required in
the future for these countries.
 24

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 Table 1. Data Definitions
Variable Definition Source
Output gap (Real GDP - Real potential GDP) as a percent of real potential GDP WEO (estimates as of Feb. 2014)
GDP growth Year-on-year growth of GDP, constant price WEO
Unemployment rate Unemployed population as a percent of labor force in corresponding age cohort. Eurostat
Net replacement rate Net benefits replacement rate is defined as the ratio of net income while out of work (mainly unemployment benefits if European Comission Tax and
unemployed, or means-tested benefits, if on social assistance) divided by net income while in work. A lower net Benefits Indicators Database
replacement rate is associated with greater incentive to search for and take up a job when unemployed.
Gross replacement rate Average of the gross unemployment benefit replacement rates for two earnings levels, three family situations and three OECD
durations of unemployment.
Inactivity trap The inactivity trap - or the implicit tax on retuning to work for inactive persons - measures the part of additional gross European Comission Tax and
wage that is taxed away when an inactive person (not entitled to receive unemployment benefits but eligible for income- Benefits Indicators Database
tested social assistance) takes up a job. In other words, this indicator measures the financial incentives to move from
inactivity and social assistance to employment.
Minimum wage/Median wage Minimum wage relative to median wage for full-time workers. This ratio is set to be zero for countries without a national OECD
minimum wage.
Protection of temporary workers Strictness of employment protection for tempororary contracts. OECD
Share of temporary workers Temporary employees as percentage of the total number of employees. Eurostat
Tax wedge (EC) The tax wedge is defined as the proportional difference between the costs of a worker to their employer (wage and European Comission Tax and
social security contributions, i.e. the total labour cost) and the amount of net earnings that the worker receives (wages Benefits Indicators Database
minus personal income tax and social security contributions, plus any available family benefits). Tax wedge measures
both incentives to work (labour supply side) and to hire persons (labour demand side).
Union density Trade union density corresponds to the ratio of wage and salary earners that are trade union members, divided by the OECD
total number of wage and salary earners (OECD Labour Force Statistics). Density is calculated using survey data,

28
wherever possible, and administrative data adjusted for non-active and self-employed members otherwise.
Adjusted bargaining power Employees covered by wage bargaining agreements as a percentage of all wage and salary earners in employment with The QOG (Quality of
the right to bargaining, adjusted for the possibility that some sectors or occupations are excluded from the right to Government) Institute,
bargain (removing such groups from the employment count before dividing the number of covered employees over the University of Gothenburg
total number of dependent workers in employment).
Share of temporary workers on probation Proportion of total temporary workers on probation (other reasons for being on temporary contracts include "could not Eurostat
find a permanent job", "did not find a permanent job", "in education or training").
Share of low-educated workers Persons with lower secondary education attainment. Eurostat
ALMP total spending per unemployed Active labor market policies are programs that intervene in the market to address unemployment, via increasing Eurostat
employment opportunities for job seekers and improving balance between jobs available and qualified job seekers. Total
spending per unemployed includes spending on labor market services, training, hiring incentives for firms, supported
employment and direct jobs (for the public/nonprofit sector), and start-up incentives for self-employment.
ALMP spending per unemployed on training Active labor market policy: spending on training per unemployed. This is a sub-component of the total ALMP spending Eurostat
defined above. Spending on training is among the largest components of ALMP spending in most countries.
 29

Table 2. Okun’s Law Estimates

Specification in Differences Specification with Output Gap
Youth Adult Youth Adult Youth Adult Youth Adult
Intercepts (ß0 + ß1,i) Okun's Coefficients (ß2,i) Intercepts (ß0 + ß1,i) Okun's Coefficients (ß2,i)
Austria 0.54 0.16 -0.21 -0.09* -0.06 -0.00 -0.23*** -0.09**
(0.67) (0.16) (0.26) (0.05) (0.15) (0.07) (0.07) (0.04)
Belgium 1.65** 0.41*** -0.90*** -0.25*** 0.04 0.01 -0.93*** -0.27***
(0.66) (0.14) (0.27) (0.07) (0.37) (0.13) (0.21) (0.09)
Cyprus 3.51*** 1.49*** -0.93*** -0.45*** -0.42 -0.16 -1.12*** -0.42**
(0.85) (0.42) (0.27) (0.12) (0.67) (0.25) (0.37) (0.20)
Estonia 3.64*** 1.47*** -0.78*** -0.33*** 0.76 0.34 -0.92*** -0.42***
(0.69) (0.56) (0.09) (0.07) (0.78) (0.36) (0.12) (0.06)
Finland 1.76*** -0.05 -0.67*** -0.16*** 0.12 0.07 -0.96*** -0.17***
(0.48) (0.12) (0.12) (0.03) (0.62) (0.13) (0.18) (0.03)
France 1.81*** 0.49*** -0.91*** -0.21*** -0.12 -0.03 -0.92*** -0.22***
(0.63) (0.16) (0.27) (0.06) (0.39) (0.12) (0.18) (0.06)
Germany 0.49 0.32 -0.30 -0.17** -0.20 -0.17 -0.15 -0.13**
(0.55) (0.22) (0.20) (0.08) (0.33) (0.20) (0.10) (0.05)
Greece 2.28*** 1.10*** -0.81*** -0.36*** 0.17 0.08 -0.79*** -0.35***
(0.44) (0.29) (0.12) (0.09) (0.40) (0.19) (0.14) (0.07)
Ireland 3.11*** 1.35*** -0.64*** -0.30*** -0.09 -0.04 -0.94*** -0.40***
(0.59) (0.34) (0.10) (0.06) (0.27) (0.16) (0.08) (0.04)
Italy 0.97** 0.33** -0.55*** -0.12* 0.23 0.06 -0.56* -0.13
(0.49) (0.15) (0.20) (0.06) (0.47) (0.13) (0.31) (0.09)
Latvia 3.18*** 1.49*** -0.76*** -0.33*** -2.96*** -1.52*** -1.06*** -0.48***
(0.65) (0.31) (0.08) (0.04) (0.75) (0.24) (0.07) (0.05)
Luxembourg 1.22* 0.27* -0.19 -0.05** 0.25 0.05 -0.11 -0.03
(0.65) (0.14) (0.12) (0.02) (0.45) (0.10) (0.07) (0.02)
Malta 1.62** 0.01 -0.85*** 0.01 -0.35 -0.00 -0.88*** -0.00
(0.82) (0.25) (0.32) (0.09) (0.31) (0.09) (0.15) (0.05)
Netherlands 0.68 0.33** -0.46** -0.22*** -0.06 -0.03 -0.41*** -0.19***
(0.66) (0.16) (0.22) (0.04) (0.23) (0.12) (0.11) (0.07)
Portugal 2.50*** 1.00*** -0.82*** -0.28*** -0.38 -0.06 -0.85*** -0.32***
(0.51) (0.15) (0.14) (0.04) (0.30) (0.11) (0.13) (0.05)
Slovakia 4.95*** 1.57*** -1.05*** -0.36*** -0.81 -0.27 -1.77*** -0.52**
(0.83) (0.54) (0.15) (0.09) (1.00) (0.48) (0.66) (0.25)
Slovenia 1.39** 0.55*** -0.58*** -0.14*** -0.35 0.03 -0.40*** -0.19***
(0.66) (0.18) (0.15) (0.02) (0.43) (0.14) (0.11) (0.05)
Spain 5.21*** 2.36*** -1.89*** -0.78*** 0.09 0.04 -2.17*** -0.92***
(0.63) (0.22) (0.18) (0.08) (0.36) (0.22) (0.19) (0.12)
Denmark 1.08** 0.55*** -0.74*** -0.36*** -0.20 -0.11 -0.78*** -0.44***
(0.51) (0.17) (0.19) (0.06) (0.20) (0.10) (0.09) (0.06)
Norway 0.83 0.21* -0.32 -0.14*** -0.01 0.08 -0.86*** -0.32***
(0.71) (0.11) (0.23) (0.04) (0.21) (0.08) (0.11) (0.05)
Sweden 2.50*** 0.36 -0.87*** -0.18** 0.49 0.02 -0.88*** -0.08
(0.57) (0.23) (0.18) (0.07) (0.65) (0.23) (0.24) (0.07)
United Kingdom 1.40** 0.46*** -0.53*** -0.21*** 0.11 0.04 -0.70*** -0.30***
(0.62) (0.12) (0.18) (0.04) (0.20) (0.10) (0.13) (0.05)
Total observations 554 493 565 509
Adjusted R-squared 0.51 0.58 0.53 0.57
Sources: Authors' estimates
 30

Table 3. Okun’s Law: Decomposition of Expenditure Components

Youth Adult Youth Adult Youth Adult
Consumption (ß2,i) Investment (ß2,i) Exports (ß2,i)
Austria -0.05 0.03 -0.10*** -0.05*** -0.05 -0.03***
(0.47) (0.23) (0.03) (0.02) (0.03) (0.01)
Belgium -1.64*** -0.36** -0.17*** -0.05*** -0.35*** -0.08**
(0.54) (0.16) (0.06) (0.02) (0.12) (0.03)
Cyprus -0.62*** -0.27*** -0.18*** -0.07** -0.17 -0.10
(0.19) (0.10) (0.04) (0.03) (0.14) (0.06)
Estonia -0.74*** -0.37*** -0.25*** -0.11*** -0.27* -0.09
(0.11) (0.08) (0.04) (0.02) (0.16) (0.09)
Finland -1.01*** -0.37*** -0.19** -0.06*** -0.10 -0.06***
(0.20) (0.12) (0.07) (0.02) (0.09) (0.02)
France -1.46*** -0.26* -0.21*** -0.05*** -0.17* -0.04*
(0.53) (0.15) (0.04) (0.01) (0.10) (0.03)
Germany -0.36 -0.06 -0.12*** -0.07*** -0.04 -0.04**
(0.37) (0.13) (0.03) (0.02) (0.03) (0.02)
Greece -0.87*** -0.39*** -0.04 -0.02 -0.08 -0.04
(0.13) (0.07) (0.02) (0.01) (0.05) (0.03)
Ireland -0.63*** -0.32*** -0.18*** -0.08*** -0.34*** -0.15***
(0.13) (0.08) (0.04) (0.02) (0.08) (0.04)
Italy -0.65** -0.13 -0.17** -0.04** -0.07 -0.02
(0.25) (0.08) (0.07) (0.02) (0.07) (0.02)
Latvia -0.58*** -0.28*** -0.17* -0.11*** -0.57** -0.20*
(0.08) (0.05) (0.10) (0.03) (0.26) (0.12)
Luxembourg -0.40* -0.08*** -0.05 -0.01** -0.01 -0.01
(0.22) (0.03) (0.04) (0.01) (0.05) (0.01)
Malta -0.22 -0.05 -0.05 0.01 -0.19*** 0.00
(0.34) (0.05) (0.04) (0.01) (0.07) (0.02)
Netherlands -0.51 -0.33*** -0.16*** -0.06*** -0.09 -0.03
(0.33) (0.06) (0.04) (0.01) (0.06) (0.03)
Portugal -0.75*** -0.24*** -0.23*** -0.08*** -0.16*** -0.06***
(0.14) (0.03) (0.05) (0.01) (0.06) (0.02)
Slovakia -0.83*** -0.41*** -0.12** -0.04 -0.15 -0.07**
(0.18) (0.13) (0.05) (0.03) (0.12) (0.04)
Slovenia -0.13 -0.16* -0.11** -0.03*** -0.25** -0.05***
(0.18) (0.08) (0.05) (0.01) (0.10) (0.01)
Spain -1.69*** -0.68*** -0.56*** -0.23*** -0.32 -0.14
(0.19) (0.13) (0.05) (0.03) (0.24) (0.11)
Denmark -0.81*** -0.39*** -0.18*** -0.08*** -0.19** -0.11**
(0.26) (0.09) (0.03) (0.01) (0.10) (0.04)
Norway -0.74** -0.33*** -0.08* -0.02* 0.06 -0.06**
(0.32) (0.10) (0.04) (0.01) (0.12) (0.03)
Sweden 0.29*** -0.46* -0.20*** -0.05** -0.10 -0.06
(0.11) (0.26) (0.04) (0.02) (0.15) (0.04)
United Kingdom -0.63*** -0.26*** -0.12*** -0.05*** -0.14 -0.06
(0.24) (0.05) (0.02) (0.01) (0.09) (0.04)
Total observations 549 488 549 488 554 493
Adjusted R-squared 0.402 0.525 0.368 0.456 0.134 0.141
Note: To conserve space intercepts for decomposition equations are not reported, but are
available upon request.
Source: Authors' estimates
 Table 4. Multivariate Model Estimates
Unemployment Rate (Level)
Youth Adult
Gross replacement rate 0.48*** 0.46*** 0.39*** 0.18*** 0.19*** 0.12***
(0.12) (0.09) (0.09) (0.05) (0.04) (0.04)
Inactivity Trap 0.31 -0.24 0.28 -0.05 -0.15 0.10
(0.20) (0.20) (0.23) (0.08) (0.10) (0.08)
Minimum wage / Median wage 1.24*** 0.40 1.34*** 0.39*** -0.06 0.56***
(0.25) (0.28) (0.28) (0.14) (0.16) (0.13)
Tax wedge 1.27*** 0.71** 0.33 0.77* 1.04*** 0.06 0.50*** 0.40*** 0.47*** 0.50*** 0.42*** 0.30**
(0.29) (0.28) (0.39) (0.39) (0.24) (0.36) (0.13) (0.13) (0.16) (0.19) (0.11) (0.15)
Union density -0.62*** -0.41*** -0.15 -0.21 -0.24* -0.20 -0.01 0.00 0.06 0.07 0.08 -0.05
(0.16) (0.11) (0.14) (0.13) (0.13) (0.15) (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
Protection of temporary workers -2.50* -3.49*** -5.20*** -1.47*** -1.49** -1.97***
(1.31) (1.22) (1.17) (0.48) (0.60) (0.59)
Share of temporary workers 0.36*** 0.44*** 0.17* 0.15 0.23 -0.20
(0.07) (0.09) (0.10) (0.16) (0.20) (0.14)
Weekly hours per worker (full-time) 1.22** 1.18** 0.97 0.70 1.13** 0.81 0.69*** 0.71*** 0.96*** 0.46* 0.89*** 0.73***
(0.47) (0.48) (0.60) (0.54) (0.45) (0.58) (0.20) (0.22) (0.22) (0.25) (0.19) (0.20)
Share of temporary workers due to probation -0.31** -0.41*** -0.25* 0.02 -0.02** 0.00
(0.14) (0.09) (0.14) (0.01) (0.01) (0.01)

31
Share of low-educated workers 0.01 0.08 0.07 -0.13*** -0.12*** -0.12**
(0.10) (0.08) (0.08) (0.04) (0.04) (0.05)
ALMP total spending per unemployed -0.36*** -0.32*** -0.21*** -0.23*** -0.27*** -0.21*** -0.13*** -0.14*** -0.07*** -0.10*** -0.08*** -0.10***
(0.06) (0.04) (0.07) (0.07) (0.06) (0.07) (0.03) (0.02) (0.02) (0.03) (0.02) (0.02)
Country-specific output gap coefficient Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Number of Observations 144 151 104 160 99 106 144 151 107 160 101 114
Adjusted R-squared 0.93 0.94 0.96 0.93 0.96 0.96 0.93 0.93 0.95 0.91 0.95 0.95

Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Homoskedasticity is tested for each regression. If rejected, robust standard errors are estimated. Equation (2) was estimated for each column.
Thi s tabl e reports onl y the coeffi ci ent before s tructura l va ri a bl e x.

Source: Authors' estimate

 32

Table 5. Univariate Model Estimates without Interaction Term

Unemployment rate Long-term Unemployment Employment rate
Youth Adult Youth Adult Youth Adult

Opportunity cost of working

Gross replacement rate 0.05 0.06*** -0.01 -0.10 -0.20*** -0.00
(0.03) (0.01) (0.07) (0.07) (0.05) (0.03)
Net replacement rate 0.12 0.09*** -0.03 -0.01 0.05 -0.12***
(0.08) (0.02) (0.07) (0.09) (0.04) (0.03)
Inactivity trap 0.33*** 0.14*** 0.00 0.02 0.02 -0.10***
(0.06) (0.03) (0.09) (0.12) (0.05) (0.02)

Hiring cost
Minimum wage/Median wage 0.18* 0.01 0.62*** 0.56*** -0.42*** -0.51***
(0.11) (0.06) (0.16) (0.17) (0.09) (0.08)
Tax wedge (EC) 0.72** 0.39*** 0.86** 1.04*** -0.30** -0.41***
(0.28) (0.11) (0.36) (0.35) (0.15) (0.08)

Collective bargaining
Union density -0.01 0.10*** 0.34*** 0.43*** 0.29*** -0.49***
(0.04) (0.03) (0.10) (0.14) (0.06) (0.04)
Adjusted bargaining power 0.16*** 0.00 -0.66*** -1.11*** 0.19*** 0.00
(0.05) (0.03) (0.24) (0.19) (0.07) (0.05)

Duality
Protection of temporary workers 2.26 1.05 3.35 2.91 1.35 -0.51
(1.78) (0.77) (2.58) (2.18) (1.05) (0.56)
Share of temporary workers 0.06** 0.06 -0.10* 0.38* -0.17*** 0.58***
(0.03) (0.05) (0.06) (0.22) (0.04) (0.08)

Education/Training
Share of temporary workers due to probation -0.14 0.02** -0.09 0.03 0.15 -0.08***
(0.08) (0.01) (0.09) (0.05) (0.10) (0.01)
Share of low-educated workers -0.12*** -0.00 0.25*** 0.36*** 0.18*** -0.30***
(0.04) (0.02) (0.05) (0.06) (0.04) (0.01)

Active labor market policy

ALMP total spending per unemployed -0.33*** -0.10*** -0.32*** -0.14 0.14*** 0.09***
(0.06) (0.02) (0.09) (0.10) (0.04) (0.03)
ALMP training spending per unemployed -0.60*** -0.18*** -0.65*** -0.25 0.10 0.22***
(0.12) (0.04) (0.21) (0.22) (0.09) (0.07)
Country fixed effect Yes Yes Yes Yes Yes Yes
Year fixed effect No No No No No No
Standard errors in parentheses.
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1
Homoskedasticity is tested for each regression. If rejected, robust standard errors are estimated. Each structural variable enters the
following regression individually. The regression below was run with each of the 13 measures of labor market features included one at a time.
This table reports only the coefficient before structural variable x due to space constraint.
22
𝑖 ,𝑡 = 0 + 1 ,𝑖 𝑖 + 2 𝑖 ,𝑗 ,𝑡 + 𝑖=1 2 ,𝑖 𝑖 𝑖 ,𝑡 𝑖 ,𝑡 + 𝑖𝑡 , where j=1, … ,13

Source: Authors' estimate

 33

Table 6. Univariate Model Estimates with Interaction Term

Youth Unemployment Rate (level)
1 2 3 4 5 6 7
Gross replacement rate 0.04
(0.03)
Net replacement rate 0.14
(0.09)
Inactivity trap 0.36***
(0.07)
Minimum/Median wage 0.20**
(0.09)
Tax wedge (EC) 0.58**
(0.27)
Union density -0.01
(0.04)
Adjusted bargaining power 0.13**
(0.06)
Austria -0.27** -0.00 0.06 0.14 0.03
(0.12) (0.00) (0.57) (0.55) (0.03)
Belgium -0.28 -0.12 -1.38* -0.29*** -2.25 0.51*** -4.31**
(0.21) (0.24) (0.79) (0.10) (2.26) (0.13) (2.14)
Cyprus 12.01*** 6.89*** -0.05
(0.32) (0.16) (0.51)
Estonia -0.17*** -0.28*** -0.03 -0.43 0.04** -0.15
(0.04) (0.06) (0.08) (0.32) (0.02) (0.12)
Finland -0.16 0.44** 0.03 -1.19** -0.11 0.10*
(0.20) (0.19) (0.55) (0.50) (0.09) (0.06)
France 0.03 -0.17 -0.22*** 0.14* 0.03 -0.00 -0.15
(0.13) (0.11) (0.06) (0.07) (0.67) (0.14) (0.14)
Germany 0.02 -0.07 0.26 0.12 0.02 0.23
(0.11) (0.14) (0.46) (0.37) (0.03) (0.21)
Greece -0.29** 0.10 -0.56** 0.19* -0.34*** 0.05 0.23**
(0.12) (0.12) (0.25) (0.11) (0.11) (0.05) (0.11)
Ireland -0.04 0.17 0.00 0.03 -1.50*** 0.05
(0.06) (0.39) (0.42) (0.09) (0.34) (0.06)
Italy -0.05 0.00 -1.91*** -1.58 0.37** 0.83***
(0.03) (0.00) (0.46) (1.28) (0.16) (0.24)
Latvia 0.03 -0.07 0.02 -0.17 -0.05***
(0.15) (0.09) (0.04) (0.14) (0.00)
Luxembourg -0.00 -0.35 -0.13 0.20 0.12 -0.18*** -0.01**
(0.01) (0.41) (0.50) (0.12) (0.47) (0.06) (0.00)
Malta -0.13** -0.09* -0.19 0.49***
(0.06) (0.05) (0.31) (0.04)
Netherlands -0.00 -0.02 -0.03 -0.08 -0.24 -0.19 0.07
(0.05) (0.14) (0.05) (0.12) (0.35) (0.22) (0.45)
Portugal -0.09 0.66*** -1.91 0.01 0.31 0.01 -0.02
(0.06) (0.16) (1.93) (0.08) (1.95) (0.02) (0.13)
Slovakia -3.54** -0.14 0.04 0.10 -1.99** 0.00 -0.18
(1.55) (0.18) (0.09) (0.29) (0.84) (0.12) (0.19)
Slovenia -0.11 -0.18 -0.09* 0.32 0.01 -0.00
(0.21) (0.21) (0.05) (0.21) (0.06) (0.00)
Spain -1.01* 1.18*** -1.49*** 0.71** -1.10*** -0.31 -0.44
(0.57) (0.28) (0.42) (0.28) (0.38) (0.21) (0.28)
Denmark 0.06* 0.55* 0.90*** 1.06*** -0.05 0.02
(0.03) (0.29) (0.31) (0.32) (0.06) (0.04)
Norway -0.04 0.27 -0.18 -0.93 -0.00 0.13
(0.03) (0.27) (0.36) (1.19) (0.18) (0.44)
Sweden 0.28** 0.32*** 0.49** 0.69** -0.17* 0.13
(0.12) (0.11) (0.23) (0.31) (0.09) (0.13)
United Kingdom -0.15 -0.38*** -0.03 0.32*** 0.63* 0.01 -0.06***
(0.20) (0.13) (0.39) (0.07) (0.32) (0.04) (0.02)
Constant 5.63*** 1.55 -12.74*** 6.63*** -19.49 7.00*** 6.51
(1.09) (4.47) (4.08) (0.40) (13.22) (1.70) (5.75)

Country fixed effect Yes Yes Yes Yes Yes Yes Yes
Year fixed effect No No No No No No No
Observations 471 239 239 507 258 498 313
Adjusted R-squared 0.77 0.83 0.84 0.78 0.86 0.77 0.76
 34

Table 6. Univariate Model Estimates with Interaction Term (concluded)

Youth Unemployment Rate (level)
8 9 10 11 12 13
Protection of temp workers -0.51
(0.37)
Share of temp workers 0.05
(0.03)
Share of temp workers due to probation -0.27**
(0.11)
Share of low-educated -0.08*
(0.04)
ALMP total spending per unemployed -0.29***
(0.07)
ALMP training spending per unemployed -0.54***
(0.15)
Austria 0.03 -0.08* -0.05 0.33*** 0.07 0.10
(0.21) (0.05) (0.06) (0.09) (0.11) (0.24)
Belgium -0.49** 0.09** -0.16 -0.02 0.14 0.41
(0.21) (0.04) (0.10) (0.19) (0.17) (0.29)
Cyprus 0.46* 0.00 0.58*** 1.99*** -4.33
(0.26) (0.00) (0.12) (0.49) (2.64)
Estonia -0.62*** -0.11* 0.12** 0.20** 0.24 3.85
(0.11) (0.05) (0.05) (0.09) (0.21) (4.66)
Finland 6.10*** -0.22 -0.52 -0.84** -0.46*** -1.00***
(1.85) (0.15) (0.39) (0.36) (0.17) (0.32)
France 0.07 0.04* -0.15** -0.29** -0.29 -1.22**
(0.72) (0.02) (0.07) (0.12) (0.19) (0.60)
Germany 0.06 -0.02 -0.14 -0.17** -0.05 -0.14
(0.19) (0.02) (0.21) (0.08) (0.14) (0.33)
Greece 0.72 0.14 -0.05 0.30*** 0.16 0.31
(0.47) (0.17) (0.24) (0.11) (0.09) (0.41)
Ireland -0.60 -0.09 -0.58*** -0.02 0.45*** 0.65***
(2.06) (0.08) (0.03) (0.07) (0.13) (0.18)
Italy 0.81** -0.05* 0.46 0.06 0.98*** -2.98***
(0.37) (0.03) (0.67) (0.08) (0.23) (0.64)
Latvia 0.00 -0.03 -0.18*** 0.23 1.46 -1.87
(0.00) (0.06) (0.06) (0.22) (1.21) (1.48)
Luxembourg 0.03 0.03 -0.04 -0.01 -0.14 0.22
(0.04) (0.03) (0.12) (0.03) (0.10) (0.27)
Malta 0.07 -0.14 -0.08** 0.10 -4.13**
(0.14) (0.11) (0.03) (1.29) (1.97)
Netherlands 1.26 0.06 -0.16*** -0.10 0.05 0.07
(2.57) (0.06) (0.06) (0.16) (0.08) (0.13)
Portugal 2.92*** -0.14*** 0.27** 0.17*** 4.29*** -0.01
(0.72) (0.05) (0.12) (0.04) (0.32) (0.94)
Slovakia -0.11 0.00 -0.15 0.15 -7.65
(1.35) (0.10) (0.95) (1.46) (5.57)
Slovenia -0.38*** -0.00 -0.14 0.06 0.87*** 1.81***
(0.11) (0.04) (0.09) (0.12) (0.10) (0.52)
Spain 3.36*** 0.05 -0.36 0.26 1.09*** 1.06*
(0.91) (0.06) (1.34) (0.18) (0.30) (0.57)
Denmark 0.10 0.05 0.00 -0.02 -0.01 0.04
(0.18) (0.03) (0.00) (0.03) (0.04) (0.09)
Norway -0.36 -0.03 -0.04* 0.10** 0.10
(2.37) (0.32) (0.02) (0.04) (0.07)
Sweden -0.98*** 0.24** 0.18 0.61 0.11 0.18
(0.28) (0.11) (0.31) (0.87) (0.10) (0.17)
United Kingdom -0.33 -0.13 0.07 0.03 -0.33** -0.37
(3.37) (0.12) (0.10) (0.02) (0.14) (2.56)
Constant 7.35*** 6.58*** 9.71*** 9.35*** 15.97*** 11.81***
(0.65) (1.06) (0.87) (0.70) (2.04) (1.19)

Country fixed effect Yes Yes Yes Yes Yes Yes

Year fixed effect No No No No No No
Observations 454 498 250 398 219 258
Adjusted R-squared 0.80 0.80 0.82 0.84 0.87 0.84
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Homoskedasticity is tested for each regression.
If rejected, robust standard errors are estimated. Equation (3) was estimated for each column.
Each structural variable enters regression individually. Table reports only the coefficient before
structural variable x and the coefficient before the interaction of country dummy, x, and output gap.
Source: Authors' estimate
 35

Figure 1. Labor and Product Market Institutions

70 100
Gross Benefit Replacement Rate, percent
Inactivity Trap, percent
2001 2011 2011 Average 90
60
80 2001 2012 2012 Average
50
70

40 60

50
30
40

20 30

20
10
10
0 0
ESP
DEU

NLD
GRC
IRL

SVK
LUX

DNK
FRA

ITA

NOR
BEL
FIN

PRT
AUT

SWE
GBR

MLT
NLD

NOR
LUX
BEL

SWE
FRA
CYP

LVA
AUT

PRT

GBR
ITA

ESP
GRC
EST
FIN

DEU

DNK
SVN
IRL

SVK
60
Tax Wedge, percent 0.8
Ratio of Minimum to Median Wage
50 2001 2013 2013 Average 0.7
2001 2012 2012 Average
0.6
40

0.5
30
0.4

20 0.3

10 0.2

0.1
0
POR
NET
LTV

NOR
LUX
MAL
GER

DEN
GRE
CYP

FRA

SWE
BEL

UK
AUT

ESP
ITA
EST
FIN

IRE

SVK
SVN

ESP
EST

GRC

IRL

NLD
LUX

SVN
SVK
BEL

LVA
FRA

PRT

GBR
Notes Latest data for Cyprus is 2007, Latvia and Malta,
2012.

90 80
Union Density, percent Share of temporary employment, 2013, percent
80 70 Youth Adult
2001
70
60
2010-11
60
2011 Average 50
50
40
40
30
30

20
20

10 10

0 0
SVN

SVK
IRL
BEL

CYP
AUT
FRA

LVA
PRT

MLT
GRC

GBR
ESP

DNK
ITA

EST
NLD
DEU

NOR
ESP

LUX
FIN
EST

DEU

SWE
GRC

NLD
IRL

SVN
SVK
LUX

DNK
FRA
BEL

NOR
ITA
FIN

PRT
AUT

SWE
GBR
 36

Figure 1. Labor and Product Market Institutions (concluded)

90 6
Part-time employment ,percent of total, 2013 Protection of Temporary Workers, rating
80 Youth Adult 2001
5
70 2013
2013 Average
60 4

50
3
40

30 2

20
1
10

0 0

ESP
GRC

DNK
DEU

ITA
FIN

IRL

SWE
BEL

FRA
AUT

PRT

GBR
NLD

NOR
SVK
SVN
IRL

BEL

CYP

AUT
FRA

LVA
PRT
MLT
GBR

GRC
ESP
DNK
NLD

ITA

EST
DEU
NOR

LUX
FIN
SWE

70 25
Total ALMP spending per unemployed, Spending on ALMP measures per unemployed,

Thousands
(thousand euros) (thousand euros)
60
2006 2006
20 2011
50 2011
2011 Average
2011 Average
15
40

30 10

20
5
10

0
0
GRC

ESP
DNK
EST

ITA
DEU
FIN

LUX

SVK
SVN

SWE
IRL
BEL
CYP
AUT

FRA

LVA

PRT
MLT

GBR
NLD

NOR
SVK
SVN
IRL
BEL
CYP
AUT

FRA

LVA

PRT
GRC

MLT

GBR
ESP
DNK
DEU

NLD
EST

ITA

NOR
FIN

LUX

SWE

6.0 35.0
Goods Market Efficiency: Competition(rating) Cost of starting a business,
percent of income per capita
2006 2013 2013 Average 30.0
5.5 2004
25.0 2014
2014 Average
5.0
20.0

4.5 15.0

10.0
4.0
5.0

3.5 0.0
GRC

ESP
DNK
EST

ITA
DEU
FIN

LUX

SVK
SVN

SWE
IRL
CYP
BEL
AUT

FRA

LVA

PRT
MLT

GBR
NLD

NOR

GRC

ESP
DNK
EST

ITA
DEU
FIN

LUX

SVK
IRL

SVN

SWE
BEL
CYP
AUT

FRA

LVA

PRT
MLT

GBR
NLD

NOR

Source: Eurostat, European Commission, OECD, World Economic Forum, World Bank Doing Business Report,
authors’ calculations
 37

Figure 2. Marginal Impacts of Labor Market Institutions on Unemployment Rates,

percentage point
Gross Replacement Rate Net Replacement Rate
0.7 0.6
Significant (Youth) 1.42
0.6 0.5
Insignificant (Youth)
0.5 0.4
Significant (Adult)
0.4
Insignificant (Adult) 0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0
-0.1 -0.1 Significant (Youth) Insignificant (Youth)
Significant (Adult) Insignificant (Adult)
-0.2 -0.2

SVK
IRL

SVN
BEL
AUT

CYP

FRA

LVA

PRT

ESP

GBR
MLT
GRC

DNK
ITA

NLD
EST

DEU

NOR
FIN

LUX

SWE
-0.3
GRC

ESP
DNK
DEU

ITA
FIN

LUX

SVK
IRL

SWE
BEL
AUT

FRA

PRT

GBR
NLD

NOR
Inactivity Trap Minimum to Median Wage Ratio
2.0 0.7
Significant (Youth)
0.6
1.5 Insignificant (Youth)
0.5
1.0 Significant (Adult)
0.4
Insignificant (Adult)
0.5 0.3

0.2
0.0
0.1
-0.5 0.0

-1.0 -0.1
Significant (Youth) Insignificant (Youth)
Significant (Adult) Insignificant (Adult) -0.2
-1.5

SVK
SVN
IRL
BEL
CYP
AUT

FRA

LVA

PRT
GRC

ESP

GBR
DNK
DEU

NLD
ITA

NOR
EST
FIN

LUX

SWE
SVK
SVN
IRL
BEL
CYP
AUT

FRA

LVA

PRT

GBR
ESP
MLT
GRC

DNK
DEU

NLD
EST

ITA

NOR
FIN

LUX

SWE

Tax Wedge Union Density

1.5 0.3

1.3 0.2

1.0 0.1

0.0
0.8
-0.1
0.5
-0.2
0.3
-0.3
0.0 Significant (Youth)
-0.4 Insignificant (Youth)
-0.3
-0.5 Significant (Adult)
Significant (Youth) Insignificant (Youth)
-0.5 Insignificant (Adult)
Significant (Adult) Insignificant (Adult) -0.6
-0.8
SVK
IRL

SVN
BEL
AUT

FRA

PRT

ESP
GRC

GBR
DNK
ITA

NLD
EST

DEU

NOR
FIN

LUX

SWE
SVK
IRL

SVN
BEL
AUT

CYP

FRA

LVA

PRT

ESP

GBR
MLT
GRC

DNK
ITA

NLD
EST

DEU

NOR
FIN

LUX

SWE
 38

Figure 2. Marginal Impacts of Labor Market Institutions on Unemployment Rates,

percentage point (concluded)
Employment Protection of Temporary Workers Share of Temporary Workers
2.0 0.3

Significant (Youth) 0.3

1.5
Insignificant (Youth) 0.2
1.0 Significant (Adult) 0.2
Insignificant (Adult)
0.5 0.1
0.1
0.0
0.0
-0.5 -0.1
-0.1
-1.0
-0.2 Significant (Youth) Insignificant (Youth)
-1.5
-0.2 Significant (Adult) Insignificant (Adult)
-2.0 -0.3
ESP
GRC

DNK

GRC
DEU

ESP
ITA

DNK
EST

DEU
EST

ITA
FIN

LUX

SVK
SVN

FIN

LUX
IRL

SWE

SVK
SVN

SWE
BEL
AUT

FRA

IRL
BEL
CYP
LVA

PRT

AUT

FRA

LVA

PRT
GBR

MLT

GBR
NLD

NOR

NLD

NOR
Share of Temporary Workers Share of Low Educated Workers
0.5 0.2

0.3 0.1

0.0 0.0

-0.3 -0.1

-0.2
-0.5
-0.3 Significant (Youth)
-0.8 Significant (Youth)
-0.4 Insignificant (Youth)
-1.0 Insignificant (Youth)
Significant (Adult) -0.5 Significant (Adult)
-1.3
Insignificant (Adult) -0.6 Insignificant (Adult)
-1.5
-0.7
-1.8

SVK
SVN
IRL
CYP
AUT
BEL

FRA

LVA

PRT
MLT

GBR
ESP
GRC

DNK
DEU

NLD
EST

ITA

NOR
FIN

LUX

SWE
IRL
CYP
BEL

FRA
AUT

LVA

PRT

GBR
ESP
GRC

MLT

DNK
DEU

NLD
EST

ITA
FIN

LUX

SLV

SWE

ALMP Total Expenditure ALMP Training Expenditure

1.5 4.0
1.0
3.0 Significant (Youth)
0.5
Insignificant (Youth)
0.0 2.0 Significant (Adult)
-0.5 Insignificant (Adult)
1.0
-1.0
-1.5 0.0
-2.0 Significant (Youth)
-1.0
-2.5 Insignificant (Youth)
-3.0 Significant (Adult) -2.0
-3.5 Insignificant (Adult)
-3.0
-4.0
SVK
SVN
IRL
BEL
CYP
AUT

FRA

LVA

PRT
MLT

GBR
GRC

ESP
DNK
DEU

NLD
EST

ITA

NOR
FIN

LUX

SWE
GRC

ESP
DNK
DEU

ITA
EST
FIN

LUX

SVK
SVN
IRL

SWE
BEL
CYP
AUT

FRA

LVA

PRT
MLT

GBR
NLD

NOR

Source: Authors’ estimates