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

Author

Listed:
  • Robert Dixon

    () (Department of Economics, The University of Melbourne)

  • John Freebairn

    () (Department of Economics and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • G. C. Lim

    () (Department of Economics and 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.

Suggested Citation

  • Robert Dixon & John Freebairn & G. C. Lim, 2006. "Time-Varying Equilibrium Rates of Unemployment: An Analysis with Australian Data," Melbourne Institute Working Paper Series wp2006n11, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2006n11
    as

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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2006n11.pdf
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    References listed on IDEAS

    as
    1. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
    2. Dixon, R., 2001. "Australian Labour Force Data: How Representative is the 'Population Represented by the Matched Sample'?," Department of Economics - Working Papers Series 772, The University of Melbourne.
    3. Robert Dixon & John Freebairn & Guay Lim, 2003. "Why are recessions as deep as they are? The behaviour over time of the outflow from unemployment: a new perspective," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 6(1), pages 37-64, March.
    4. Lixin Cai & Robert G. Gregory, 2004. "The Labour Market Conditions, Applications and Grants of disability support Pension (DSP) in Australia," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 7(3), pages 374-394, September.
    5. Balakrishnan, Ravi & Michelacci, Claudio, 2001. "Unemployment dynamics across OECD countries," European Economic Review, Elsevier, vol. 45(1), pages 135-165, January.
    6. Simon Burgess & Hélène Turon, 2005. "Unemployment dynamics in Britain," Economic Journal, Royal Economic Society, vol. 115(503), pages 423-448, April.
    7. Robert E. Hall, 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications," American Economic Review, American Economic Association, vol. 93(2), pages 145-150, May.
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    Cited by:

    1. G.C. Lim & Robert Dixon & Sarantis Tsiaplias, 2009. "Phillips Curve and the Equilibrium Unemployment Rate," The Economic Record, The Economic Society of Australia, vol. 85(271), pages 371-382, December.
    2. Chew Lian Chua & Robert Dixon & G. C. Lim, 2007. "What Drives Worker Flows?," Melbourne Institute Working Paper Series wp2007n34, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    3. Robert Dixon & John Freebairn & Emayenesh Seyoum-Tegegn, 2008. "State & Territory Beveridge Curvesand the National Equilibrium Unemployment Rate," Department of Economics - Working Papers Series 1033, The University of Melbourne.
    4. Jeff Borland, 2009. "What Happens to the Australian Labour Market in Recessions?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(2), pages 232-242.

    More about this item

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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