Natural and cyclical unemployment: A stochastic frontier decomposition and economic policy implications

Abstract

This work splits effective unemployment into two components: natural unemployment, and cyclical unemployment. For that purpose, an estimation of the stochastic cost frontier is performed. The study is focused on the 17 autonomous communities in Spain over the period 1982–2012. Results evidence greater importance of the natural component as the principal determinant of effective unemployment.When comparing these results with those obtained applying univariate filters, the distribution in the components of the effective unemployment changes, increasing the importance of cyclical unemployment. This result indicates that the policymakers should have a greater power to implement aggregate demand policies.