The purpose of this paper is to identify the main mechanisms and factors driving the labour market from a macroeconomic perspective and to reveal why unemployment is so persistent. In this paper, the Tunisian labour market is analysed using annual data from 1972 to 1999 and a cointegrated structural VAR model. This approach helps identify the important trends and analyse the interactions between them, particularly between unemployment and the essential variables that are closely linked to it: productivity, employment and real wage determination. Generally speaking, productivity captures effects linked to technical progress, allocative efficiency, capital formation and other supply shocks. The authors argue that productivity has evolved mainly as a result of investment, meaning that capital has indeed been an important factor in the employment and unemployment process. The results of the paper show the following:
* productivity has a permanent negative effect on unemployment
* in the long run, technical progress, partly through investments, reduces unemployment
* higher productivity generates enough positive effects on employment through higher income and demand
* the wage setting shocks have had a significant negative effect and contributed to the aggravation of unemployment
* more investment leads to less unemployment
* unemployment is also due to lack of human and physical capital.
In conclusion, unemployment is caused mainly by the combination of two different phenomena associated with productivity and real wage setting. The results stress the importance of creating the right incentives and improving the business environment in order to increase the rate of investment in both physical and human capital, which are the main sources of technological progress