The Relationship between Unemployment Components and Economic Growth: the Czech Republic Case

• Thesis title in Czech: The Relationship between Unemployment Components and Economic Growth: ; the Czech Republic Case
• Thesis title in English: The Relationship between Unemployment Components and Economic Growth: ; the Czech Republic Case
• Key words: nezaměstnanost, frikce na trhu práce, ekonomický růst, DSGE
• English key words: unemployment, search and matching frictions, economic growth, DSGE
• Academic year of topic announcement: 2013/2014
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 28.05.2014
• Date of assignment: 28.05.2014
• Date and time of defence: 22.06.2015 00:00
• Venue of defence: IES
• Date of electronic submission: 12.05.2015
• Date of proceeded defence: 22.06.2015
• Opponents: doc. PhDr. Julie Chytilová, Ph.D.

Guidelines

A reasonably low unemployment is one of the priorities of all modern economies with the Czech Republic being no exception. However, it is a rather volatile variable and recent events such as the financial and economic crisis drove it higher across the European Union and also worldwide. The range of policy tools to choose from in order to diminish the number of jobless persons might be wide, but decision about the optimal choice entails the knowledge of labor market structure and sources of unemployment. Two of the possible sources are: lack of jobs and mismatch of jobs and workers. The influence on unemployment, each of these two factors have, varies in periods of robust growth and in economic slowdown. Therefore, the optimal government policy targeted towards improving the situation on the labor market should take the economic growth and an ongoing situation in the labor market into consideration.

The aim of this thesis is to examine the relationship of unemployment components behavior and the economic growth and investigate implications for unemployment policies.

In the first chapter, an overview of the literature on search and matching frictions in dynamic stochastic general equilibrium models and the development of Czech labor market modeling will be presented.\\
The second chapter will proceed with an estimation of matching function parameters with emphasis on matching efficiency. The mismatch between jobs and workers will be estimated using a rolling fixed effects model on panel data for all 14 Czech regions during the last 15 years.

The third chapter will use a DSGE model with search and matching frictions in the labor market and to obtain impulse responses of labor market variables to a negative technology shock. Next, a non-linear rational expectations model will be adopted in order to decompose the unemployment rate into cyclical and structural components.

Finally, the last chapter will assess the effects of public employment, which can be used as an unemployment policy tool, on the unemployment during a period of economic slowdown.

References

Michaillat, P., (2012), “Do Matching Frictions Explain Unemployment? Not in Bad Times.” American Economic Review, 102 (4). pp. 1721-1750.

Michaillat, P., (2014), "A Theory of Countercyclical Government Multiplier." American Economic Journal: Macroeconomics, 6(1): 190-217.

Galuščák, K., Münich, D., (2007), „ Structural and Cyclical Unemployment: What Can Be Derived from the Matching Function?", Finance a úvěr - Czech Journal of Economics and Finance, 57 (3-4), pp. 102-125.

Galí, J., (2010), “Monetary Policy and Unemployment”, National Bureau of Economic Research, Cambridge.

Auerbach, A. J., Gorodnichenko, Y., (2010), Measuring the Output Responses to Fiscal Policy.”, National Bureau of Economic Research, Cambridge.

Mayer, E., Stähler, N., Moyen, S., (2010), "Government expenditures and unemployment: a DSGE perspective", Discussion Paper, Economic Studies, No. 18/2010, Frankurt am Main.

Gomes, P. B. M., (2010), "Macroeconomic Effects of Fiscal Policy.", Dissertation thesis at the London School of Economics and Political Science, London.

Monacelli, T. et al, (2010), “Unemployment Fiscal Multipliers”, National Bureau of Economic Research, Cambridge.

Campolmi, A., Faia, E., Winkler, R.C., (2010), "Fiscal Calculus in a New Keynesian Model with Labor Market Frictions", MNB Working papers 2011/5, Magyar Nemzeti Bank, Budapest.

Preliminary scope of work

1. Introduction
2. Literature overview
a. Search and matching frictions in DSGE modeling
b. Development of Czech labor market modeling
c. Matching function and the Beveridge curve
3. Cyclical and structural unemployment in the Czech republic
a. Matching function estimation
b. Data
c. Results
4. Labor market model with search and matching frictions
a. DSGE model
b. Nonlinear rational expectations model of unemployment
c. Data and calibration
d. Results
e. Business cycle effects on unemployment
5. Unemployment policy during an economic slowdown
a. DSGE model
b. Data and calibration
c. Results
6. Conclusion

Preliminary scope of work in English

This thesis provides a complex view on the unemployment in the Czech Republic during the past 15 years and as such contributes to the existing literature on the topic in three ways.
First, the development of mismatch level in the Czech labor market is estimated. Second, the time series of unemployment rate is decomposed into its cyclical and structural components. Both these results are then united and interpreted with regard to the economic growth. Third, optimal unemployment policies are suggested and public hiring is examined in detail.