Page 9 - AEI Insights 2019 - Vol. 5, Issue 1

Furuoka et al, 2019

1980s were around 6 percent and increased to around 8 percent in the 1990s. Much of Europe,
including Germany, faced an economic crisis in the mid-2000s. As a result, the unemployment
rates in Germany were around 11 percent during this period. After a slow recovery from the
crisis, by 2010 the rate had gone down to 7 percent (World Bank, 2018).

By contrast, unemployment rates in Thailand were around 4 percent in the 1980s. Southeast
Asian economies, including Thailand, enjoyed a high economic growth in the first half of the
1990s, during which the unemployment rates in Thailand were around 1 percent. Even when
the region faced the Asian Economic Crisis at the end of the 1990s, unemployment rates in
Thailand increased to only 3 percent. After its recovery from the economic crisis,
unemployment rates in the country decreased back to 1 percent (World Bank, 2018).

To understand the above differences between Asian and European unemployment patterns, this
paper set out to examine labour market dynamics and their connection with unemployment
rates in the two regions. This is done not only from an economic perspective, but also from a
socio-cultural one. In other words, there is a relatively weak tendency of the mean-reversion in
the unemployment rates in Europe. It would means that there is a hysteresis in the
unemployment rate in the European labour market. By contrast, there is a relatively strong
tendency of the mean-reversion in the unemployment rates in Asia. It would imply that there
is no hysteresis in the unemployment rate in the Asian labour market. In other words,
unemployment rates in Thailand are relatively lower than Germany. These differences could
be explained by the difference in social security. European countries tend to have a better social
security system to protect their workers than Asian countries.

The paper consists of five sections. Following this introductory section, the second section
offers a theoretical framework for unemployment dynamics. The third and fourth sections
examine the main characteristics of European and Asian labour markets. The final section
concludes with key lessons and implications of the study.

Theoretical perspectives on labour market dynamics
There have been numerous empirical studies of labour market dynamics since the seminal
publication on unemployment hysteresis by Phelps (1972), and Blanchard and Summers
(1986). Some researchers have used the time-series unit root method to examine labour market
dynamics (Neudorfer et al., 1990; Brunello, 1990; Mitchell, 1993; Røed, 1996) while others
opted for the panel unit root method (Song and Wu, 1998; Tieslau and Lee, 2001; Christopoulos
and Leon-Ledesma, 2007; Chang et al., 2005; Camarero and Tamarit, 2004; Ener and Arica,
2011). There are also those who have used more advanced methods, such as the Lagrange
Multiplier (LM) test and the fractional integration method, et cetera (Romero-Avila and
Usabiaga, 2007a; Romero-Avila and Usabiaga, 2007b; Sephton, 2009; Lee et al., 2009).
Geographically speaking, most of these empirical works have focused on European countries
and there is very limited research on this topic done on Asia. Some notable exceptions are
studies conducted by Smyth (2003), Lee et al. (2010), Furuoka (2012), Furuoka (2017a), and
Furuoka (2017b).
More importantly, there is no formal theoretical model to describe labour market dynamics.
However, an employment model suggested by Blanchard and Summers (1986) could be used
for the baseline model to underline some basic characteristics of labour market dynamics. This
employment model has been further developed by other researchers (Song and Wu, 1998; Bell
and Mankiw, 2002; Furuoka, 2017a; Furuoka, 2017b). To summarise, the employment model
assumes that money supply (m) has a positive impact on the firm’s output (yi). Additionally,
it also assumes that the price level in the country (p) has a negative impact on the output. In

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