On the significance of labour reallocation for European unemployment: Evidence from a panel of 15 countries

Abstract

We explore the macroeconomic effects of sectoral shifts for 15 European countries. An extensive panel is constructed that allows us the assessment of the impact of labor reallocation on unemployment in the European context. Indexes of labor market turbulence based on alternative sectoral disaggregation are constructed. The effect of labor reallocation on unemployment is found to be positive and significant in all different specifications. This remains robust when we take into account volatility measures in the model. JEL classification: E24, E32, J21, R23, C23Keywords: labor reallocation, sectoral shifts hypothesis, unemployment, EU * Acknowledgements: We would like to thank Richard Bailey and two anonymous referees for their constructive comments and helpful suggestions. We would also like to thank Karim Abadir and Paolo Giordani for their useful comments and suggestions on earlier versions of this work. All remaining errors are our own.Bakas:

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“…Bakas, Panagiotidis et al (2016) find a positive and statistically significant effect of labour reallocation on unemployment for 15 European countries. Interestingly, Hogrefe and Sachs (2014) find that sectoral reallocation was a driving factor for unemployment in Spain Jauer, Liebig et al (2019).…”

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“…Within this vast body of literature, a significant, but relatively smaller, component has investigated sectoral shifts in the regional perspective. Recent works (Bakas et al, 2016(Bakas et al, , 2017Simon, 2014;among others) have revisited previous efforts by incorporating up to date developments in panel data econometrics regarding dynamics, heterogeneity, and cross-sectional dependence.…”

“…These analytical features reflected the state of the art at the time these studies were carried out. Given recent advances in panel data econometrics, Bakas et al (2016Bakas et al ( , 2017 have gone beyond the limitations of FE estimation and were able to account for heterogeneity, spillover effects and common factors in a more complete way.…”

“…In addition, using the purging strategy of Abraham and Katz (1986) the QR panel approach can alleviate any potential endogeneity problem of labour reallocation. Other approaches have been suggested in the literature to address the endogeneity of reallocation (see, for example, Bakas et al, 2016, 2017 and Chodorow‐Reich & Wieland, 2020, among others). Bakas et al (2016, 2017) use a system GMM approach to tackle endogeneity, by employing lagged levels and differences of the endogenous variables as instruments, while Chodorow‐Reich and Wieland (2020) use an instrumental variable framework, by exploring a Bartik‐style measure of predicted reallocation as an instrument for actual reallocation.…”

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“…2013; Fernandez-Villaverde et al, 2015); corporate investment (Gulen and Ion, 2016); labor market dynamics (Bakas et al, 2016); and political polarization (Azzimonti and Talbert, 2014).…”