A new indicator of labour market uncertainty

What is it about?

This paper examines the evolution of labour market uncertainty after the irruption of the COVID-19 pandemic in European countries. Since uncertainty is not directly observable, we use two alternative methods to directly approximate it. Both approaches are based on qualitative expectations elicited form the consumer survey conducted by the European Commission. On the one hand, following Dibiasi and Iselin (2021), we use the share of consumers unable to formalise expectations about unemployment (Knightian-type uncertainty). On the other, we use the geometric discrepancy indicator proposed by Claveria (2021) to quantify the proportion of disagreement in business and consumer expectations. We use a non-linear autoregressive distributed lag model to analyse the relationship of both measures with the unemployment rate in 21 European countries, the UK, the eurozone and the European Union. This approach allows testing for long-run and short-run potential asymmetries.

Featured Image

Photo by Hennie Stander on Unsplash

Photo by Hennie Stander on Unsplash

Why is it important?

The contributions of this study focus on four different aspects: i) first, the measurement of labour market uncertainty ii) second, the comparison between two recent metrics of uncertainty based on consumer expectations iii) third, the evaluation of the effects of uncertainty on unemployment through non-linear econometric techniques in order to capture the potential existence of asymmetries between both variables iv) the estimation of the responses of unemployment to positive and negative unit changes in uncertainty by computing the dynamic multipliers. We find that both uncertainty measures covary across the 22 European countries analysed. Although we observe differences in the evolution across countries, in most cases the perception of labour market uncertainty peaked before the outbreak of the crisis, plummeted during the first months of the lockdown, and started rising again. When testing for cointegration with the unemployment rate, we find that both indicators exhibit a long-term relationship with unemployment in most countries. The impact of both indicators on unemployment is characterised by considerable asymmetries, showing a more intense reaction to decreases in the level of labour market uncertainty. While this finding may seem counterintuitive at first sight, it somehow reflects the fact that during recessive periods, the level of disagreement in consumer unemployment expectations drops considerably.

Perspectives