Analysis of the Development of the Unemployment Rate in Lithuania: Application of the SVAR Model

Tomas Reichenbachas

doi:10.15388/ekon.2015.3.8789

Abstract

The paper analyses the dynamics of unemployment in Lithuania, using a structural vector autoregressive model (sVAR) with long-term restrictions proposed by Fabiani et al. (2001). In accordance with it, the unemployment rate is predetermined by economic shocks, some of them with long-term effects (structural) and some with short-term ones (cyclical). The greater part of changes in unemployment in the period of 2002 to 2014 were predetermined by cyclical shocks (of productivity and labour supply and demand). The cyclical unemployment, peaked in the years 2010 to 2011, amounted to ca. 6%. On the other hand, structural unemployment is slow to change, in the years of the economic boom (2006 to 2007) it amounted to ca. 8% (at the time, the cyclical unemployment was negative and the economy encountered overheating, while in 2014 structural unemployment was slightly higher and amounted to ca. 11%).

Highlights

In 2009, due to a sharp economic decline caused by the global financial crisis in quite a few countries, the unemployment rate in them reached the heights unseen since the time of the Great Depression
Some economists kept supporting further expansionary policies (e.g., Krugman (2012); DeLong et al (2012)): they emphasised that economic growth remained rather sluggish and the unemployment rate was still high, which indicated that the economy had not yet reached its potential
In the years of the economic boom (2006 to 2007), it amounted to ca. 8%, the economy faced overheating

Summary

Introduction

In 2009, due to a sharp economic decline caused by the global financial crisis in quite a few countries, the unemployment rate in them reached the heights unseen since the time of the Great Depression. Under the persistence of the said trends, a question arises whether the high unemployment in the countries is a “new equilibrium” or whether it is a temporary condition, with the unemployment rate tending to return to its pre-crisis level. Some economists kept supporting further expansionary policies (e.g., Krugman (2012); DeLong et al (2012)): they emphasised that economic growth remained rather sluggish and the unemployment rate was still high, which indicated that the economy had not yet reached its potential. Summers (2013) and DeLong et al (2012) reminded the concept of the hysteresis in unemployment, proposed by Blanchard et al (1986): a persisting high cyclical unemployment could become structural and reduce the potential of the economy. Currently the unemployment rate in Lithuania is lower than in most of the EU member states, it remains at a significantly higher than the pre-crisis (e.g., in 2007) level.

The conception of natural unemployment and the hysteresis effects

Findings

Conclusions