An evaluation of the structural unemployment rate in Finland

Abstract

This background report provides a literature review of research papers and an analysis of structural determinants contributing to the Finnish structural unemployment rate. The literature review examines current microeconomic research and policy reports on distinctive factors contributing to the structural unemployment rate in Finland. The analysis section utilizes a macroeconometric model to derive structural determinants of unemployment for Finland. The structural determinants are estimated with a model built by the European Commission’s Directorate-General for Financial and Economic Affairs, utilizing an EU13 panel setup for the time frame 1987–2016. The estimation of structural determinants yields a decomposition of the non-accelerating wage rate of unemployment (NAWRU), thus allowing for a closer assessment of how various structural determinants relate to the Kalman-filtered unemployment trend and to one another in scope and significance. The main findings of the analysis suggest that structural labor market indicators, such as the tax wedge, union density and the unemployment benefit replacement rate, heavily influence NAWRU. The results also indicate that the NAWRU component is affected by demand-side boom-and-bust cycles, proxied by the proportional size of the construction labor force.