On the Causality between Economic Growth and Unemployment

Abstract

This chapter investigates the relation and causality of economic growth and equilibrium unemployment for the European G7 countries - France, Germany, Italy and the United Kingdom. Whilst endogenous growth models with matching frictions on the labor market predict a causal relationship from economic growth to unemployment, efficiency wage models predict the opposite direction of causality, and insider-outsider models indicate causality in both ways. Granger causality tests for the four European G7 countries indicate that France can be explained through the matching model, and Italy and Germany by the efficiency wage model. The United Kingdom follows either a union model or the efficiency wage model, depending on the number of lags included in the estimation.