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Unemployment Surges in the EU: The Role of Risk Premium Shocks
Author:
Mr. Bas B. Bakker
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Marta Korczak null

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Mr. Krzysztof Krogulski null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 056
Language:
English
Publication Date:
18 Mar 2019
DOI:
https://doi.org/10.5089/9781484399637.001
ISBN:
9781484399637
ISSN:
1018-5941
Pages:
33
Keywords:
WP; risk premium shock; risk premium; interest rate; GDP; Risk premia; interest rates; Euro area crisis; global economic; fincanial crisis; debt ratio; risk premium surge; unemployment surge; financing cost; Return on investment; Unemployment; Employment; Sovereign bonds; Baltics
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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In the last decade, over half of the EU countries in the euro area or with currencies pegged to the euro were hit by large risk premium shocks. Previous papers have focused on the impact of these shocks on demand. This paper, by contrast, focuses on the impact on supply. We show that risk premium shocks reduce the output level that maximizes profit. They also lead to unemployment surges, as firms are forced to cut costs when financing becomes expensive or is no longer available. As a result, all countries with risk premium shocks saw unemployment surge, even as euro area core countries managed to contain unemployment as firms hoarded labor during the downturn. Most striking, wage bills in euro area crisis countries and the Baltics declined even faster than GDP, whereas in core euro area countries wage shares actually increased.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund