A SMOOTH-TRANSITION MODEL OF THE AUSTRALIAN UNEMPLOYMENT RATE
Models of the aggregate unemployment rate have traditionally
been estimated from structural models of the labour market or in
a linear single-equation framework. However, theory as well as evidence
suggest that the unemployment rate is asymmetric and should be modelled
in a non-linear framework. In this paper the unemployment rate in Australia
is modelled as a non-linear function of aggregate demand and real wages.
Negative changes in aggregate demand cause the unemployment rate to rise
rapidly, while real wage rigidity contributes its to slow adjustment back
towards a lower level of unemployment. The model is developed by exploiting
recent developments in automated model-selection procedures.