How should the functioning of the labour market be assessed?

This report presents the Economic Affairs Department's assessment of how the functioning of the labour market will develop between 2006 and 2020 and the methods used in this assessment. The report summarises a project begun by the Department in autumn 2010. It focuses on trends in equilibrium unemployment, potential employment and the potential labour force, which together provide an overall picture of the functioning of the labour market.

One important objective in estimating equilibrium unemployment, for example, is to make it possible to decompose actual (measured) unemployment into a cyclical and a structural component. This decomposition is useful in forecasting and also for understanding the need for stabilisation policy measures or establishing the long-term fiscal scope for reform.

The development of the functioning of the labour market can also be used to follow up whether employment policy has the intended effect in the long run and, to a certain extent, also to assess the need for further structural reforms. The aim of several of the Government's reforms is to increase potential employment by reducing equilibrium unemployment or increasing labour force participation. Monitoring the development of these estimated quantities provides an indication of whether the reforms have had the intended effect. High equilibrium unemployment or low potential labour force participation may also indicate that economic policy measures may improve the functioning of the labour market.