Time-Varying Equilibrium Rates of Unemployment: An Analysis with Australian Data

Robert Dixon, John Freebairn and Guay Lim

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: In this paper we explore a new approach to understanding the evolution of the unemployment rate in Australia. Specifically, we use gross worker flows data to explore the consequences of assuming that there is no unique equilibrium rate of unemployment but rather a continuum of stochastic equilibrium rates which reflect the movement of the entry and exit rates over time. It is shown that the stochastic equilibrium unemployment rate and the observed unemployment rate are very closely related and we explore the reasons why this is so. We examine the short-run dynamics of the entry and exit rates (specifically, the impulse response functions) and the impact on the unemployment rate of shocks to the entry and exit rates and find that shocks to the entry rate have been more important than shocks to the exit rate in bringing about variations in the unemployment rate over our sample period. We then present a new way to disentangle the effects on the (equilibrium) unemployment rate of the business cycle and structural shifts. It would appear that there was a once and for all downward shift in the equilibrium rate(s) of unemployment in Australia in the early 1990s, which likely reflects the introduction of a more generous system of disability pension benefits.

Pages: 27 pages
Date: 2006-05
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Time-varying equilibrium rates of unemployment: an analysis with Australian data (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2006n11

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