A Keynesian Approach
New Directions in Modern Economics series
Chapter 4: Explaining the Rise in European Unemployment: An Evaluation of the NAIRU Story and a Keynesian Approach
While the NAIRU theory stresses labour market institutions as the cause for the rise in European unemployment, Keynesian approaches highlight demand deﬁciency and, more speciﬁcally, low capital investment as the key reason. In this chapter some econometric ﬁndings regarding the causes of the rise in unemployment are reported. The empirical work will cover the large European countries – Germany, France, Italy and the UK – and, for comparisons, the USA. We focus on the large European countries because they are the ones that experienced the most pronounced increase in unemployment, whereas many small European countries fared remarkably well. Since we are interested in the rise in unemployment, the method employed will be time series analysis. The period of investigation will cover the period from the early 1960s to the mid-1990s. This chapter presents the empirical tests that are performed to evaluate the explanatory power of the NAIRU model and the Keynesian model. It is structured as follows. First, we present basic speciﬁcations of the NAIRU and the Keynesian model. Second, we discuss data sources and the time series properties of the variables. Third, the econometric method utilized is presented. Fourth, the tests for the NAIRU model and, ﬁfth, of the Keynesian model are presented. Section 6 combines the two models. Finally issues of robustness and causality are discussed. Additional tests are to be found in the Appendix. 4.1 BASIC SPECIFICATION OF THE NAIRU AND THE KEYNESIAN MODELS In this section we present the speciﬁcation of the NAIRU model...
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