Asymmetric unemployment-output tradeoff in the Eurozone

This study investigates the asymmetric unemployment-output tradeoff in the Eurozone. Building upon the framework of an augmented Okun's law, the nonlinear autoregressive distributed lag (NARDL) modelling reveals that the nature of Okun's law is asymmetric. For the Eurozone economies, the empirical evidence demonstrates that labour markets quickly respond to cyclical outputs in a short period, while the adjustments towards new equilibrium become weak in the long run. In addition, the cross-sectional analysis of long run asymmetries indicates that government spending and trade balance are key factors affecting the asymmetric unemployment-output relationship. Therefore, member states might conduct effective labour market reforms taking into account the identified asymmetries and asymmetry determinants. These results also seem to suggest that, in spite of the fact that member states lack monetary sovereignty, flexible application of fiscal reforms could help to reduce asymmetric effects.