What determines unemployment in the long run? Band spectrum regression on ten countries 1913-2016

The rise in unemployment since the 1980s has been predominantly
understood as driven by short-term shocks, or long-run conditions in the
form of rigid labor market institutions or 'jobless growth', mostly based
on studies on the period from 1960 onward. Aggregate demand is usu-
ally assumed to have no long-run impact on unemployment, but recent
contributions call this into question. This paper adopts a long-run view
of macroeconomic history to explore the long-run relationship between
unemployment and macroeconomic variables. We use wavelet analysis to
decompose time series covering ten countries 1913-2016, into short-run,
medium-run, and long-run variations, and band spectrum regressions on
the relation between unemployment, GDP, investment, interest rates and
productivity. Through estimations of cross-country regression models, we
find strong indications that unemployment correlates negatively with the
long-run components of investment. Taking potential structural breaks
into consideration in each of the ten countries and ignoring other vari-
ables, our results indicate that short- to long-run components of capi-
tal formation explain between 40 percent and 81 percent of variations
in unemployment. Our results support the view that economic models
of long-run unemployment and labor market policy should take long-run
conditions for investment into account.