Symmetric and asymmetric persistence of labor market shocks

David Begg, Assar Lindbeck, Chris Martin, Dennis Snower

Research output: Contribution to journalArticle

Abstract

Within the insider-outsider paradigm, this paper examines persistence of shocks in the labor market. We distinguish "symmetric persistence" where the extent of persistence is independent of the initial direction of the shock, and "asymmetric persistence" where beneficial and adverse shocks of equal magnitude have effects of different size. The paper offers a theoretical rationale for how the symmetry or asymmetry may depend on the extent to which the shock was anticipated in wage setting and then develops a framework in which the possibility of asymmetric persistence can be tested empirically. Using annual UK data, we obtain empirical evidence of significant asymmetry in the response of employment (and wages) to shocks. Small beneficial shocks are reflected entirely in wage increases, although sufficiently large favorable shocks also elicit increases in employment. In contrast, adverse shocks lead to reductions in both wages and employment. Evidence from Japan and West Germany provides some evidence of the presence of asymmetry, although this is less marked than in the United Kingdom. The policy implications are discussed.

Original languageEnglish
Pages (from-to)554-577
Number of pages24
JournalJournal of The Japanese and International Economies
Volume3
Issue number4
DOIs
Publication statusPublished - 1 Dec 1989

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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