How supply and demand shocks affect productivity and unemployment growth: evidence from OECD countries

In this paper we highlight the joint dynamic behavior of three key variables in labor market. Precisely, by means of a structural VAR we employ labor productivity, real wage and unemployment to identify the structural shocks affecting their pattern, in the long and short-run. We will label them as technology, markup and aggregate demand shocks, respectively. The impulse responses of each variable to shocks provide the measure of their (relative) elasticity in explaining the behavior of labor market in six OECD countries, namely Italy, France, Spain, Germany, UK and USA. We find that: (1) the conditional correlations between productivity and real wage are positive for both supply and demand shocks, (2) the impulse responses show a persistent increase of both productivity and real wage to supply shocks, (3) the level of unemployment shows a persistent decrease when hit by a positive demand shock. The main result of our analysis is that Keynesian policies can have permanent effect on the labor market equilibrium.