Natural Rate of Unemployment and the Flexibility of the Labor Markets

Abstract

In this paper I investigate how the natural rate of unemployment is affected from various institutions of the labor market. I find that union density, benefit replacement rate, expenditure on active labor market policies per unemployed person, and employment protection legislation play a significant role in explaining the differences in long-term unemployment rates across the OECD countries. Besides that, I also look at whether the vacancy rate and the participation rate are affected from the structure of the labor markets. An increase in the employment protection legislation index and union density generate a decline in the vacancy rate. As far as the participation rate is concerned, an increase in the employment protection legislation index and benet replacement rate increase the inactivity rate, whereas an increase in expenditure on active labor market policies causes an increase in the participation rate.