Confidence measures explain European unemployment dynamics
A Bank of England working paper finds that confidence measures capture non-technological news shocks, explaining 50 percent of European unemployment variance. These shocks persistently affect unemployment over business-cycle horizons.
Confidence signals future job market
A Bank of England working paper reveals that confidence measures from firm and household surveys across 22 European countries primarily capture non-technological forces.
These "confidence innovations" are almost perfectly correlated (-0.95) with disturbances driving long-run unemployment dynamics, explaining roughly 50 percent of unemployment variance at business-cycle frequencies.
The identified shock behaves as a mildly inflationary transitory demand shock, leading to persistent declines in unemployment, increased investment, wages, interest rates, fiscal surplus, and vacancies.
It is orthogonal to identified monetary policy shocks and prompts professional forecasters to revise unemployment expectations downward, supporting a news-based interpretation.
Unpacking the 'news' in confidence
The research employs a mixed-frequency Panel FAVAR model, extending sequential identification to analyze labor productivity, unemployment, and a latent confidence factor across 22 European countries.
This approach disentangles technological, non-technological, and confidence shocks.
Unlike previous studies linking stock prices to technological forces, this paper finds confidence innovations align with non-technological factors governing long-run unemployment.
The study contributes to the debate on "animal spirits" versus "news" in confidence, favoring a news interpretation due to the shocks' substantial explanatory power and persistent macroeconomic responses.
Confidence as a policy signal
This paper fundamentally reorients the understanding of European unemployment dynamics, emphasizing non-technological news captured by confidence measures.
For policymakers, this means firm and household sentiment offers a potent, forward-looking indicator for labor market fluctuations, distinct from technological or monetary policy shocks.
The identified mechanism, while not pinpointing an exact structural source, underscores the critical need for a broader forecasting perspective.