Unemployment Scarring: a European perspective using micro data

Abstract

We estimate dynamic panel data models of unemployment incidence for men across Europe using the European Community Household Panel Survey. Problems relating to initial conditions, unobserved heterogeneity and the stayer phenomenom are addressed, allowing true state dependence effects to emerge. We find strong evidence of state dependence across all EU countries included in the sample, consistent with the scarring theory of unemployment - an individual's previous unemployment experience has implications for his future labour market behaviour. Therefore policies that reduce short-run unemployment incidence will have longer-run effects by reducing the natural rate of unemployment. The size of the effect appears to be unrelated to country specific levels of employment protection legislation.