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The dependent variable in the empirical analysis is the harmonized unemployment rate taken from the OECD key short-term economic indicators database. Some data is missing for earlier periods of some countries. To ensure consistent time series, I calculate the growth rates of the unemployment rate as a percentage of civilian labor force (which is not harmonized) and extend the harmonized unemployment rates by concatenating the change of the country-specific unemployment rate. Of course, this could give rise to criticism since it is doubtful whether the unemployment rates for early periods are comparable or not. However, only Austria from 1982 to 1992, Germany from 1982 to 1990 and Switzerland from 1982 to 1991 are affected by this adjustment. Therefore, I prefer to have a larger data set at the expense of a probably small bias.

To check for robustness, I also use the unemployment rates based on labor force surveys provided by the ILO. When data is missing, observations have been constructed based on the growth rates of the employment office records unemployment rates using the same approach as for the OECD series.

6.2.2 Institutions

I have four indicators for the tax system, the payroll tax, the income tax, the consumption tax rate, and the sum of these three factors, which is the tax wedge. The taxes have been constructed according to the definition given in Nickell and Nunziata (2001).

The payroll tax t1 is calculated as

–  –  –

with tls equal to taxes less subsidies on products and imports and f ce equal to the final consumption expenditure of households. The tax wedge tw is calculated as tw = t1 + t2 + t3.

Note that I did not just update the Nickell and Nunziata data but recalculated the whole series. Some considerable changes compared to the Nickell and Nunziata data occurred probably due to data updates made by the OECD.

Overall, four indicators for the bargaining system and power are available. The union density, union coverage, minimum wages, bargaining coordination and bargaining centralization all have been taken from the Visser database (see Visser 2009). The bargaining coordination is an index ranging from 1 to 5 with 1 indicating fragmented bargaining at the company level, and 5 indicating economy-wide bargaining. The bargaining centralization is an indicator from 1 to 5 and shows the level at which the bargaining is conducted.

1 means very low centralization at the company level and 5 on a national level. The minimum wage indicator ranges from 1 (no minimum wage) to 8 (national minimum wage set by the government). The union density indicator consists of the percentage of wage and salary earners which are organized in a union. The union coverage indicator shows the percentage of employees whose wage bargaining is affected by wage bargaining agreements.

The employment protection legislation indicator ranges from 0 to 6. The higher the value the higher the degree of protection. The indicator is taken from the OECD labour statistics database.

According to Nickell (2006), I construct the replacement rates for the first year, the second and third year, as well as for the fourth and fifth year of unemployment as indicators for the unemployment benefit system. Additionally, I include an overall indicator for the level of benefits which is the unweighted average of the three sub-measures, and a measure for the benefit duration. The benefit duration indicator bd equals

–  –  –

where brr23 are the second and third year benefits, brr45 the fourth and fifth year benefits, and brr1 the first year benefits. Since the OECD provides such detailed series only until 2003, I had to update the series with help of the OECD tax benefit models available on the OECD homepage. Hence, I use the definitions given by the OECD (see OECD 1994, Chapter 8) to update the series. Note that the tax benefit models provide data on unemployment benefits which are biased for some countries. The particular time series have to be checked and adjusted according to the country-specific definitions available at the OECD homepage (the current link which leads to the country-specific files on benefits and wages is http://www.oecd.org/document/29/0,3343,en 2649 34637 39618653 1 1 1 1,00.html ).

The Fondazione Rodolfo de Benedetti delivers data on unemployment benefit coverage for the complete period as a fraction of job seekers entitled to benefits over the total number of job seekers. Some observations are missing for Belgium (2000-2005), Italy (1982-1989 and 2003-2005), Sweden (1982-1994), Switzerland (1982-1984) and the United Kingdom (1996). In order to include it in the model averaging approach, I assign the missing observations the same value as the first preceding or successive observation with a valid value. If both a preceding and successive value is available, I construct the mean.

Data on product market regulation come from the OECD, as well. I use the regulation indicators in energy, transport and communication sectors (ETCR). This database delivers information on the barriers to entry and on public ownership for the described sectors.

I use the aggregate indicators in the empirical section. Note that the aggregate ETCR indicator consists of the barriers to entry, the public ownership, and some additional indicators. These additional indicators are not comprehensively available over sectors which is why I cannot take them into account. For a detailed description about the construction of the product market regulation data see Conway and Nicoletti (2006).

6.2.3 Shock Variables and Macroeconomic Controls

Generally, I closely follow the approach proposed by Nickell et al (2005). Note that all data which are required for the construction of the shock variables are provided by the OECD. I construct four shock variables which probably influence the unemployment rate in the short run. The real import price is the import price deflator divided by the GDP deflator. According to the following equation, the shock is the log change of the real import price (IP S) times the import share in GDP.

Imports IPdef lator IP S = log (10) GDP GDPdef lator with IPdef lator being the import price deflator.

The real interest rate is the long-term interest rate corrected for the current inflation rate.

For the construction of the total factor productivity (TFP) shocks I follow Bassanini and Duval (2006) and calculate first the change in the log of TFP as ∆ln(Y ) − α∆ln(T E) + (1 − α)∆ln(K) ∆ln(T F P ) = (11) α with Y equal to the GDP in the business sector, T E is total employment, K the gross capital stock, and α the share of labor income in total business sector income. By cumulating the changes in the log TFP’s over years I get the TFP in each year. Finally, I take the deviations from the TFP trend to construct an index for TFP shocks by applying the Hodrick-Prescott filter with a λ of 100.

The labor demand shock is the change in the residuals of a labor demand model to be estimated. Hence, I estimate the following equation for each country and take ε as the country-specific labor demand shock.

ln(T Et ) = β0 + β1 ln(T Et−1 ) + β2 ln(T Et−2 ) + β3 ln(T Et−3 ) + β4 ln(Yt ) + β5 ln(LCt ) + εt.

(12) Again, T E is total employment, Y is the real GDP and LC are the real labor costs per employee. The real labor costs are calculated as the total labor costs of the total economy divided by the number of dependently employed workers.

Data on the change in the inflation rate is taken from the OECD database. Following Baccaro and Rei (2007) I construct this variable as CP It − CP It−1.

The lagged labor productivity growth (LPG) is the series provided by the OECD. For Austria, information is only available from 1996 on. I use the Total Economy Database information on labor productivity (GDP per hour worked) and extend, using the OECD approach, the labor productivity growth series for Austria as (ln(LP Gt −ln(LP Gt−1 )∗100.

Data on public spending on active labor market policy is provided by the OECD.

For the credit constraints I use data from Beck and Demirg-Kunt (2009). More specifically, the indicator for private credit by deposit money banks and other financial institutions over GDP is used.

The output gap series are delivered by the OECD.

7 References Acemoglu, D. and Shimer, R. (1999): Efficient Unemployment Insurance, Journal of Political Economy, Vol. 107(5), 893-928.

Acemoglu, D. and Shimer, R. (2000): Productivity gains from unemployment insurance, European Economic Review, Vol. 44(7), 1195-1224.

Addison, J., Blackburn, M. and Cotti, C. (2009): Do minimum wages raise employment?

Evidence from the U.S. retail-trade sector, Labour Economics, Vol. 16(4), 397-408.

Aidt, T. and Tzannatos, Z. (2008): Trade unions, collective bargaining and macroeconomic performance: a review, Industrial Relations Journal, Vol. 39(4), 258-295.

Amable, B., Demmou, L. and Gatti, D. (2007): Employment Performance and Institutions: New Answers to an Old Question, IZA Discussion Papers, No. 2731.

Arulampalam, W. (2001): Is Unemployment Really Scarring? Effects Of Unemployment Experiences On Wages, Economic Journal, Vol. 111(475), 585-606.

Baccaro, L. and Rei, D. (2007): Institutional determinants of unemployment in OECD countries: Does the deregulatory view hold water?, International Organization, Vol. 61(3), 527-569.

Baker, D., Glyn, A., Howell, D. and Schmitt, J. (2005): Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence, chapter 3 of D. Howell, ed., Fighting Unemployment: The Limits of Free Market Orthodoxy, (Oxford University Press).

Baltagi, B. (2003): Economic Analysis of Panel Data, Third Edition, Wiley, England.

Bassanini, A. and Duval, R. (2006): The determinants of unemployment across OECD countries: Reassessing the role of policies and institutions, OECD Economic Department Working Papers, No. 486.

Beck, T. and Demirg-Kunt, A. (2009): Financial Institutions and Markets Across Countries and over Time: The Updated Financial Development and Structure Database. World Bank Economic Review, Vol. 24(1), 77-92.

Belot, M. and van Ours, J. C. (2004): Does the recent success of some OECD countries in lowering their unemployment rate lie in the clever design of their labor market reforms?, Oxford Economic Papers 56(1), 621-642.

¨ Bennmarker, Mellander, E. and Ockert, B. (2009): Do regional payroll tax reductions boost employment?, Labour Economics, Vol. 16(5), 480-489.

Bertrand, M. and Kramarz, F. (2002): Does Entry Regulation Hinder Job Creation?

Evidence from the French Retail Industry, Quarterly Journal of Economics, Vol 117(4), 1369-1413.

Blanchard, O. and Giavazzi, F. (2003): Macroeconomic effects of regulation and deregulation in goods and labor markets, Quarterly Journal of Economics, Vol. 118(3), 879-907.

Blanchard, O. and Wolfers, J. (2000): The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence, Economic Journal, Vol. 110(462), 1-33.

Calmfors, L. (1993): Centralisation of Wage Bargaining and Macroeconomic Performance, OECD Economics Department Working Papers, No 131.

Calmfors, L. and Driffill, J. (1988): Centralization of wage bargaining, Economic Policy, Vol. 3(1), 13-61.

Conway, P. and Nicoletti, G. (2006): Product Market Regulation in the Non-manufacturing Sectors of OECD Countries: Measurement and Highlights, OECD Economics Department Working Papers, No. 530.

Daveri, F. and Tabellini, G. (2000): Unemployment, growth and taxation in industrial countries, Economic Policy, Vol. 15(30).

Dority, B. and Fuess Jr., S. (2007): Labor Market Institutions and Unemployment: Can Earlier Findings be Replicated?, Quarterly Journal of Business and Economics, Vol. 46(4), 23-44.

Dromel, N., Kolakez, E. and Lehmann, E. (2010): Credit Constraints and the Persistence of Unemployment, Labour Economics, forthcoming 2010.

Elmeskov, J., Martin, J. P. and Scarpetta, S. (1998): Key lessons for labour market reforms: evidence from OECD countries’ experiences, Swedish Economic Policy Review, Vol. 5(2), 205-252.

Fiori, G., Nicoletti, G., Scarpetta, S. and Schiantarelli, F. (2007): Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?, IZA Discussion Papers, No. 2770.

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