A Markov-switching structural vector autoregressive model of boom and bust in the Australian labour market

Abstract

Major economic events, such as the global financial crisis, are episodes of identifiable duration that differ from other time periods. Using monthly data on the unemployment rate, labour force participation rate and employment for Australia for the period from 1978 to 2012, we estimate a Markov-switching SVAR model to examine the relationship between unemployment and labour force participation and the performance of the Australian labour market. Three distinct labour market regimes are identified. We find that the labour market switches between periods of low unemployment and high participation, prolonged periods of relative stability and short, sharp periods of high unemployment and low participation. A key finding is that, due to the behaviour of workers not in the labour force, the long-term effect of an upswing in labour hiring results in a lower unemployment rate and a lower labour force participation rate.Keywords Unemployment · Labour force participation · Regime switching JEL Classification O11 · O57 · C23 Noel Gaston and Gulasekaran Rajaguru: The comments of Felix Chan, Phillip Chindamo and two anonymous referees are gratefully acknowledged. The authors are also grateful to Lance Fisher and Jan-Egbert Sturm for feedback on an earlier version of the paper. As customary, the authors bear the responsibility for all errors and omissions.

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“…Gaston and G. Rajaguru (2015) investigated the unemployment rate, the labour force participation rate (LFPR) and the employment rate in Australia during the period from 1978 to 2012. They estimated the Markov-switching structural vector autoregression (SVAR) in order to examine the relationship between unemployment, labour force participation and productivity in the Australian labour market [11]. The research revealed the existence of different regimes in the functioning of the labour market, including the regime with low unemployment and the low Labour Force Participation Rate (LFPR), the long period of relative stability and the short period of high unemployment and a low coefficient of labour force participation.…”