Unemployment Surges in the EU: The Role of Risk Premium Shocks

By Bas B. Bakker, Marta Korczak, Krzysztof Krogulski

March 18, 2019

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Bas B. Bakker, Marta Korczak, and Krzysztof Krogulski. Unemployment Surges in the EU: The Role of Risk Premium Shocks, (USA: International Monetary Fund, 2019) accessed November 8, 2024

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.

Summary

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.

Subject: Employment, Financial crises, Financial institutions, Labor, National accounts, Return on investment, Sovereign bonds, Unemployment

Keywords: Baltics, Debt ratio, Employment, Euro area crisis, Financing cost, Fincanial crisis, GDP, Global economic, Interest rate, Interest rates, Return on investment, Risk premia, Risk premium, Risk premium shock, Risk premium surge, Sovereign bonds, Unemployment, Unemployment surge, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/056
Stock No:

WPIEA2019056
ISBN:

9781484399637
ISSN:

1018-5941

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