The Natural Unemployment Rate in Australia since the Seventies*

Abstract

The natural rate of unemployment is calculated based on Lilien's(1982) notion that an increase in the sectoral dispersion of demand results in a rise in unemployment for a given level of aggregate demand. In contrast to earlier applications, the dispersion measure is based on sectoral employment growth rates purged of aggregate influences using a VAR model. We find that most of the rise in unemployment in Australia since the 1970s reflects the increase in the underlying natural rate. This finding is broadly consistent with Lilien's results for the US as well as earlier results for Australia and Canada.