In this paper we address the question of whether labor supply shifts are the only source of the productivity slowdown that occurred across European countries in the last 15 years. This explanation implies that labor demand shifts are irrelevant. Using a simple dynamic model of the labor market, we show that the poor economic performance of the European countries can only be accounted for by a combination of two shocks: an adverse technological shock to the labor demand and a positive non-technological shock to the labor supply resulting from changes in institutions. We use a structural VAR model to estimate the contribution of these two shocks to the dynamics of employment and productivity. Our main conclusion is that technological shocks explain the decrease of the growth rate of productivity but not the increase in employment. The non-technological shocks, on the other hand, can capture the increase of employment but not the slowdown of labor productivity. Thus, both shocks are necessary to provide a complete picture of the employment-productivity trade off in Europe during the last 15 years.
Available at: http://works.bepress.com/giuseppe_travaglini/1/