What does this analysis say about the future? It suggests that the future may be brighter than the past.
At this stage, the shocks which are most relevant appear to be the still high real interest rates and the labor demand shifts (the elimination of labor hoarding). Real interest rates however are declining. The elimination of labor hoarding is bad for employment in the short run, but should eventually lead to more capital accumulation and more employment later on.
There is also progress in reforming labor market institutions. Employment protection is being slowly reduced. If demand policies are used to maintain growth and help reduce actual unemployment in line with equilibrium unemployment, more progress on labor market reforms is feasible. In short, a more favorable environment and better labor market institutions may at last lead to the reduction of European unemployment.
