| In the international literature, theoretical as well as empirical studies have attempted to investigate how labour mobility among different manufacturing sectors is capable of explaining the course of unemployment. According to the sectoral shifts hypothesis, demand changes lead to changes in production patterns among different manufacturing sectors. These changes in production, in turn, lead to shifts in the labour force from one manufacturing sector to another. However, it is known that labour mobility is characterised as a time-consuming process. It is this time-consuming process that, in the interim, contributes to higher unemployment.
Moreover, in the literature of business cycles two are the most strong theoretical schools of thought that have attempted to explain the swings of certain real economic variables, such as production, unemployment, consumption and investment. The first follows the Keynesian school and it holds that the main determinants of unemployment are changes emerging from the demand side of the economy. According to the aggregate demand hypothesis, it is changes in demand that cause the presence of business cycle phenomena, even though that labour mobility is absent. By contrast, the rivalry theory of real business cycles holds that real factors (disturbances), i.e. changes in productivity, technological advances, changes in consumer's tastes, are responsible for the economic phases that an economy has to go through.
The objective of this paper is to test empirically the two alternative theories -demand versus real factors- regarding the determinants of unemployment in Greece under the hypothesis that certain degrees of labour mobility do exist in the economy. Unemployment in Greece has been characterised by a continuous rising course over the last 20 years. The empirical attempt of this study is based on the construction of an index, as a proxy of real disturbances that measures the diversity of stock prices. The empirical results will provide an explanation about the strength of the rivalry theories of business cycles in general and the determinants of unemployment in particular.
The results are crucial for the future of the Greek economy within the European Monetary Union (EMU) system. In cases where real factors seem to be responsible for the course of unemployment, this implies that the Greek economy has to undertake serious structural changes to successfully cope with the EMU challenge. The usual monetary and exchange rate policy 'weapons' will be proved to be totally invalid.
The methodology of unit roots as well as the methodology of OLS reach the following results: First, the index of stock-price diversity and unemployment are positively associated. Second, it is the contribution of the diversity index (a proxy for real factors) that it is responsible for explaining unemployment issues in Greece. Therefore, economic policy makers in Greece have to advance certain structural changes, i.e. higher competition in commodity markets and more flexible labour markets, that will alleviate the unemployment problem. |
|
