The aim of the thesis is to examine, mainly, how labour market dynamics affect unemployment. We consider labour market models where current decisions - regarding employment, wage setting, and labour supply behaviour - depend on past decisions, and where these lagged adjustment processes interact. These interactions are the centerpiece of the chain reaction theory of unemployment, in which each labour market shock has a chain reaction of unemployment effects. Chapter 1 analyzes two important dynamic influences: (i) the prolonged effects of temporary shocks, called unemployment persistence, and (ii) the delayed effects of permanent shocks, which we call imperfect unemployment responsiveness. Focusing on three countries - Germany, UK, and US - we identify significant labour market lags, and measure the degree to which these lags are responsible for unemployment persistence and imperfect responsiveness. Chapter 2 shows that in multi-equation labour market models containing lagged endogenous variables and exogenous variables with nonzero long-run growth rates the natural rate of unemployment - as conventionally defined for empirical purposes - is not a reference point (a value toward which the equilibrium unemployment rate tends with the passage of time). Chapter 3 evaluates the natural rate and chain reaction theories of unemployment. For an empirical model of the UK labour market, we show that un-employment does not converge to the natural rate, as conventionally defined. Furthermore, we show that the labour market lags account for a substantial part of the UK long-run equilibrium unemployment rate as well as for the movement of UK unemployment over the past one and a half decades. Chapter 4 shows that real inertia (sluggish adjustment of real variables) may have a powerful role to play in generating the real effects of nominal (demand) shocks, and nominal inertia (sluggish adjustment of nominal wages and prices) may be important in propagating real (supply-side) shocks.

This thesis investigates overeducation as an aspect of integration among the second generation in Western Europe. As the second generation grows and establishes themselves in the labour market, research about their labour market outcomes becomes increasingly important. Using nine rounds (2002-2018) of the European Social Survey (ESS), this thesis investigates the impact of being a second generation on the probability of being overeducated in Western Europe. An overeducation-measure is developed using the realised matches-approach and weighted linear probability models are performed on pooled and country-stratified samples. The thesis takes into account labour market supply-and demand-side characteristics to discuss possible mechanisms behind the results. The results show that across Western Europe, the second generation faces a higher probability of being overeducated compared to their native counterparts. The UK stands out, where the second generation is subject to an 8,53-percentage point higher probability of being overeducated than the natives. Parental origin and level of education are important supply-side factors, where the second generation with parents from non-EU countries and those with non-tertiary educated parents have higher probabilities of being overeducated. On the demand-side, employment and unemployment protection regulations are associated with overeducation, where stricter employment protection and higher net replacement rates in unemployment is associated with lower probabilities of overeducation among the second generation. This thesis highlights the importance of assessing the labour market supply- and demand-side characteristics in research about labour market outcomes for the second generation, and contributes to the research field with the comparative perspective.