Are unemployment differentials among advanced economies still explained by the Shocking Institutions Hypothesis?

The average unemployment rate in Europe has been consistently higher than in the United States since 1980. The main explanation offered by a large economics literature is based on the interaction between shocks and institutions (the Shocking Institutions Hypothesis). The contribution of this paper is twofold: to assess whether this prevailing explanation holds once we take into account recent shocks (globalisation, China, etc.) and time-varying labour market institutions; and to offer a decomposition (using the Shapley-Owen approach) of the relative contributions of shocks, institutions and their interactions. While our results confirm the general validity of the Shocking Institutions Hypothesis, we argue that it is more complex and nuanced than originally formulated. • Shocks, institutions and their interaction still explain unemployment rates • The Shocking Institutions Hypothesis holds, but with important nuances • Globalisation shocks interact differently with various labour market institutions • Effects of shocks and institutions vary by age and gender of workers • We decompose and quantify the causes of variation in unemployment