COMMON TRENDS AND HYSTERESIS IN SCANDINAVIAN UNEMPLOYMENT

We examine the sources of labor market fluctuations in the Scandinavia n countries using structural VAR models with common trends. Our primar y concerns are the sources of hysteresis in unemployment and possible differences between the economies. A simple economic model is presente d to motivate our identifying assumptions. We show how estimates of th e theoretical parameters may be obtained from the estimated common tre nds coefficients. The empirical results suggest that (i) the only comm on source of hysteresis in the Scandinavian labor markets is shocks to wage setting (or, equivalently, equilibrium unemployment); (ii) trans itory labor demand shocks, which are emphasized in the theoretical lit erature on hysteresis, do not seem to be empirically important. (C) 19 97 Elsevier Science B.V.