Sources of German unemployment: a structural vector error correction analysis

Alternative models used in similar studies such as Jacobson et al. (1998), Carstensen and Hansen (2000) and Hansen and Warne (2001) differentiate between producer and consumer wages. Since these models increase the variable set used in the empirical analysis and require additional assumptions for the identification of the SVECM, they are not considered here. Using this simple model comes at some cost, e.g. a zero income effect on labor supply is assumed.

The τ _int ⁺-test performed relatively well in comparison to other test variants (see Lanne et al. 2002).

Visual inspection of the time series possibly suggests additional trend breaks in 1979. Therefore, we have checked the robustness of our conclusion regarding the unit root properties with unit root tests that allow for two breaks in the level and trend as suggested by Lee and Strazicich (2003) using exogenous break dates 1979:1 and 1990:3. The results for e, u and w−p are in line with those from Table 1. For gdp−e we obtain a borderline result. While the null hypothesis is formally not rejected, the test statistic is very close to the critical value, perhaps indicating that productivity does not have a unit root. However, stationarity is rejected in each of the two subsamples 70.1–89.4 and 79.1–98.4 by the test of Lee and Strazicich (2001) which allows for one break. Therefore, we treat gdp−e as being I(1) in the following.

PcFiml by Doornik and Hendry (1997) has been used for the cointegration analysis.

Note, that the second cointegration vector (see Appendix B) may be interpreted as an equilibrium labor supply function, where labor supply is directly affected by income. This interpretation is, however, not in line with our theoretical model.

Also note that we do not restrict the labor demand shocks to have permanent effects. Leaving the long-run effects unrestricted could still give zero long-run impact estimates.

The effects on the impulse responses of using two cointegration relations is explored in Appendix B.