itude from these shocks are similar when two very distinct empirical tools are used, with the VAR model imposing very little economic structure (apart from the long run constraints), while QUEST consists of explicitly estimated structural equations and estimated adjustment lags.
В· Employment shock: A positive employment shock initially leads to an increase in productivity; however, this short run positive effect in the VAR model is partly spurious. In the medium and long run the effect on productivity is negative, ie an increase in employment is associated with a decrease in labour quality. Note, though, that this negative long run effect is estimated to be small: a shock which leads to a permanent increase in the level of employment of about 1% is associated with a long run productivity level effect of about -0.1%. Analysis based on QUEST model simulations yields fairly similar results to the VAR approach, but the negative impact upon the productivity level is slightly stronger (-0.3 instead of -0.1) over the medium term; moreover, the QUEST model analysis does not reveal any short run increase in productivity.
В· Productivity shock: A positive productivity shock is associated, in the short-run, with a small negative employment effect. The order of magnitude of the employment effect is only about one tenth of the size of the productivity shock. By implication, this analysis suggests that a structural slowdown in labour productivity growth will, by itself, not be associated with an expansion of employment. Again, in the QUEST model analysis a qualitatively similar pattern to the VAR emerges, but the short-run negative employment response appears to be somewhat stronger.
В· Demand shock: The demand shock is initially associated with a positive employment and productivity effect. This result appears quite plausible, since a demand shock is likely to lead to better capacity utilisation in the short run. As the demand effect fades away and employment is slow to adjust, the productivity effect turns negative and dies out within a year.
Graph 3 : Impulse response analysis
3a) Employment shock
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3b) Productivity shock
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3c) Demand shock
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Graph 4: QUEST analysis
4a) Employment shock
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4b) Productivity shock
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In the second step of the empirical analysis, the shocks are cumulated over the period 1995q1 to 2003q4 in order to derive an estimate for the structural component in employment growth and its likely impact on productivity and vice versa. The results of this exercise are depicted in Graph 5. The cumulated size of the employment shock over the period 1995-2003 is estimated at about 5%. Thus, roughly one half of the overall observed employment expansion over that period is attributed to structural trend improvements. According to the VAR approach the cumulated prod...
