Confidence measures drive European unemployment dynamics
A new Banco de España working paper finds that confidence measures largely drive European labor market fluctuations. These dynamics are primarily influenced by non-technological news shocks that persistently affect unemployment.
Non-technological news shapes job market
A Banco de España working paper investigates the role of consumer and firm confidence in European unemployment dynamics.
Using a mixed-frequency Panel FAVAR across 22 European countries, the researchers identify a confidence innovation that is almost perfectly correlated (-0.95) with disturbances driving long-run unemployment.
This contrasts with a weaker correlation (0.44) with long-run productivity, suggesting confidence primarily reflects non-technological forces.
The study extends the sequential identification approach, originally applied to stock prices and TFP, to labor productivity, unemployment, and a latent confidence factor.
This confidence innovation explains the major share of the forecast error variance of the confidence factor at all horizons, supporting a 'news view' of confidence.
Confidence shocks lower unemployment persistently
A simultaneous identification scheme disentangles technological, non-technological, and confidence shocks, interpreting the latter as non-technological news.
Confidence shocks generate a persistent decline in unemployment over business cycles, peaking three to four years after impact, and explain 50% of its forecast-error variance.
These shocks also raise confidence and have limited short-run effects on labor productivity.
They resemble a mildly inflationary transitory demand shock, increasing investment, wages, interest rates, fiscal surplus, and vacancies.
Professional forecasters revise unemployment expectations downward following positive confidence shocks, supporting the news interpretation.
Beyond 'animal spirits'
This research provides a robust empirical framework, highlighting confidence's genuine informational content about future non-technological fundamentals.
While the study quantifies the impact of these news shocks on unemployment, the exact structural source remains elusive.
For policymakers, monitoring confidence offers a valuable, forward-looking signal for labor market dynamics, despite lacking direct policy levers.