6/2023 Dmitry Kulikov, Nicolas Reigl. The natural rate of unemployment in Estonia: empirical determinants and a new semi-structural model
Working Papers of Eesti Pank 6/2023
This paper addresses the empirical modelling of the natural rate of unemployment in Estonia. It has two interlinked parts. The first part considers potential empirical determinants of the natural rate of unemployment in a sample of 31 OECD countries, and the second incorporates many of those determinants into a new quarterly semi-structural model of the natural rate of unemployment for Estonia, which we estimate over the period 1998–2019. Our methodological approach to building this new semi-structural model is to explore a space of 4 × 212 alternative model specifications, each one featuring a distinct
combination of extrinsic determinants of the natural rate, and measures of the rate of unemployment and the state of the labour market in Estonia. We find that although some of these potential determinants enter our model in a statistically significant way, the overall time dynamics of the estimated natural rate of unemployment for Estonia are not much affected by these factors, and our estimates of the natural rate are quite similar across all of these determinants over the full sample period. However, we also find that our estimates of the natural rate of unemployment are quite sensitive to the choice of measures of the state
of the labour market and the rate of unemployment used in estimating the new model.
JEL classification: E32, E58, C32, C52
Keywords: natural rate of unemployment, unemployment gap, NAIRU, panel data, semi-structural modelling, model averaging