The Persistence-Resilience Trade-off in Unemployment: The Role of Labor and Product Market Institutions

The “great recession” has affected labor markets in Euro-area countries in very different ways. The paper documents two important aspects of their response: the impact effect of the recession on the rate of unemployment, and the persistence of high unemployment. We find that countries lie on a trade-off between “resilience” and “persistence”: countries where the rate of unemployment is less affected on impact (resilience) typically show higher unemployment persistence. We then investigate the role of labor and product market institutions, we find evidence that more protected markets are associated to more resilience at the expenses of more persistence. This suggests that implementing front loaded “structural reforms” at times of a fiscal consolidation may foster the rise in unemployment and possibly undermine the political support for the reforms. When we estimate how much product and labor market reforms have contributed to the rise of unemployment in Southern Europe, however, we find positive relatively small effects, that are quickly reversed.