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Title: The Role of Confidence Measures in European Unemployment Dynamics.

Abstract: This paper explores the role of confidence measures in macroeconomic dynamics, focusing on their impact on unemployment in Europe. Using a mixed-frequency Panel FAVAR model with data from 22 European countries, we find that confidence shocks, which have no immediate effect on productivity or unemployment, are strongly correlated with non-technological shocks driving long-term unemployment dynamics. By applying a simultaneous identification approach with short- and long-run restrictions, we show that confidence shocks account for approximately 50% of unemployment variance in the medium run. These results support the “news” view of confidence and challenge both the traditional view that focuses solely on technological news and the conventional belief that technological news shocks are the primary drivers of business cycles, suggesting instead that confidence-related shocks linked to non-technological factors play a significant role. To validate our empirical findings, we develop a structural search and matching model, demonstrating that under adaptive learning, confidence shocks in the form of news can explain a substantial portion of unemployment fluctuations. This research shifts the focus from technological to confidence-related shocks, providing new insights into labor market dynamics. (Authors: Marta Garcia Rodriguez (BdE) and Clemente Pinilla Torremocha (BoE & ERUNI))