Structural Unemployment in Finland

Pasi Holm and Elina Somervuori

No 136, Discussion Papers from VATT Institute for Economic Research

Abstract: Since the Finnish unemployment rate has rocketed to a very high level in the beginning of the 1990?s it is worth to study to what extent the unemployment rate prevailing today is due to cyclical or to structural reasons. In this paper we try to estimate two different indicators that represent the structural part of unemployment, the NAWRU and the NAIRU. The NAWRU (non-accelerating wage rate of unemployment) measures the structural unemployment simply by relating unemployment to wage inflation. The estimated NAWRU follows very closely the actual unemployment in Finland indicating that it is not the proper measure for the structural unemployment. The NAIRU (non-accelerating inflation rate of unemployment) in this paper is based on structural estimates of the price setting behaviour of firms and the wage setting behaviour of trade unions. The estimated NAIRU was at a low level up to the end of eighties. Since then both the actual unemployment rate and the NAIRU have rocketed. In the mid-nineties the NAIRU was about 12 percent (plus - minus 2 percentage points) while the actual unemployment rate was about 18 percent.

Keywords: Actual and structural unemployment, Labour market, Työmarkkinat, Effectiveness of public services, Julkisten palvelujen vaikuttavuus, C000 - Mathematical and Quantitative Methods: General, E240 - Macroeconomics: Employment; Unemployment; Wages; wage indexation, J640 - Unemployment: Models, Duration, Incidence, and Job Search, (search for similar items in EconPapers)
Date: 1997
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