What determines unemployment in the long run? : Band spectrum regression on ten countries, 1913-2016

This paper presents an empirical analysis of the relation between un-employment and macroeconomic performance. A strong correlation hasbeen pointed out before, but a crucial question is over what time-horizonthis holds. To the best of our knowledge, no previous cross-country studyhas shown that there is a long-run relationship between unemploymentand macroeconomic performance over a time-period that stretches beforethe 1960s. To address this issue, we use wavelet analysis to decompose thetime series into short, medium and long-run variations, and band spec-trum regressions on the relation between unemployment, GDP, invest-ment, long-term interest rate and TFP, covering ten countries 1913-2016.This methodology has several advantages compared to standard econo-metrical methods and other tools for decomposition. Our results showthat unemployment correlates negatively with the long-run componentsof investment. This suggests that aggregate demand and capital formationinuence long-term labor market outcomes. According to our estimatesca 17-percent of overall variations in unemployment and 29 percent ofthe long-run variations may be explained by long-run variations in capitalformation. (Less)