Determinants of Unemployment Flows,LabourMarket Institutions and Macroeconomic Policies

The paper makes use of newly developped information on unemployment dynamics. On the basis of a matching model of the labour market the paper analyses the economic, institutional and policy determinants of unemployment in- and outflows. Standard determinants are found to be significant with the expected sign. In particular adverse productivity shocks, higher user costs of capital, stronger real wage growth, heavier tax burden, larger unionization rate and more stringent employment protection legislation can be shown to depress unemployment dynamics. The paper also identifies the impact of policy interventions through fiscal and labour market spending using a macroeconomic, simultaneous equation set-up. The paper assess the relative contribution of these policies in stimulating unemployment outflows and analyzes the effectiveness of different policy instruments at different time horizons, stressing the importance of passive labour market measures to stimulate unemployment outflows and to limit unemployment inflows.