The role of shocks and institutions in the rise of European unemployment: The aggregate evidence

Two key facts about European unemployment must be explained: the rise in un employment since the 1960s, and the heterogeneity of individual country exp eriences. While adverse shocks can potentially explain much of the rise in unemployment, there is insufficient heterogeneity in these shocks to explai n cross-country differences. Alternatively, while explanations focusing on labour market institutions explain current heterogeneity well, many of thes e institutions pre-date the rise in unemployment. Based on a panel of insti tutions and shocks for 20 OECD nations since 1960 we find that the interact ion between shocks and institutions is crucial to explaining both stylised facts.