The Relationship between the Economic and Financial Crises and Unemployment Rate in the European Union -- How Institutions Affected Their Linkage

TL;DR

This study investigates how institutional differences in the EU influence the impact of economic and financial crises on unemployment rates, revealing that inclusive institutions mitigate adverse effects and enhance resilience.

Contribution

It introduces a novel analysis of institutional clusters and their moderating role on crisis impacts using panel data from 2003-2017 in the EU.

Findings

Inclusive institutions reduce unemployment vulnerability during crises.

Countries with better institutional quality show more resilience.

Institutional features significantly influence crisis-related unemployment dynamics.

Abstract

This paper aims to estimate the impact of economic and financial crises on the unemployment rate in the European Union, taking also into consideration the institutional specificities, since unemployment was the main channel through which the economic and financial crisis influenced the social developments.. In this context, I performed two institutional clusters depending on their inclusive or extractive institutional features and, in each cases, I computed the crisis effect on unemployment rate over the 2003-2017 period. Both models were estimated by using Panel Estimated Generalized Least Squares method, and are weighted by Period SUR option in order to remove, in advance the possible inconveniences of the models. The institutions proved to be a relevant criterion that drives the impact of economic and financial crises on the unemployment rate, highlighting that countries with inclusive institutions are less vulnerable to economic shocks and are more resilient than countries with extractive institutions. The quality of institutions was also found to have a significant effect on the response of unemployment rate to the dynamic of its drivers.