Structural and Cyclical Factors and the Composition of Open Unemployment in Chile

Abstract

Unexistence of a inverse relationship between unemployment level and the observed wage changes has been empirically detected in the Chilean case. In this regard, the paper points out the need of distinguishing between structural and cyclical components of the total open unemployment. The structural unemployment is determined by the existence of market imperfections, and it is likely not to be an important factor in affecting market wages. Hence, based upon a segmented labor market model —in which the presence of segmentation is due to labor market distortions— empirical estimates of the cyclical and structural components of the total unemployment are obtained. Subsequently, the paper shows that a regression between observed wage changes and the level of cyclical unemployment produces the expected negative correlation. The conclusion point outs that the distinction between unemployment components is paramount to understand the dynamics of the labor market.