The long run effects of aggregate demand and mark up shocks on Italian unemployment rate

This paper estimates a VAR including labor productivity, real wage and unemployment rate, to identify the dynamic effects of technology, demand and mark up shocks, respectively, on the Italian labor market. Identification is achieved by imposing recursive restrictions on the matrix of long run multipliers. Our results show that both mark up and aggregate demand shocks permanently reduce the unemployment rate. Finally, technology shocks do not significantly affect the unemployment rate in the long run. These findings convey important policy implications: expansionary aggregate demand and deregulation policies reducing the mark up permanently decrease the Italian unemployment rate.