Regime Switching Modeling of Unemployment Rate in Eastern Europe

Abstract

This paper investigates the unemployment rate dynamics in Poland, Hungary, Slovakia, Latvia, Lithuania, Estonia, Bulgaria, Romania and Ukraine during 2000 – 2017. To analyze the dynamics of unemployment rate we constructed econometric regression models with nonlinearities that arose due to discrete changes in modes. We developed Markov switching model that allowed capturing the regularities by modeling the asymmetry in the unemployment rate during contractionary and expansionary states of the labor market. We evaluated two regimes of unemployment behavior that were associated with high and low unemployment levels and estimated the transition probabilities of regime change and average expected durations in each regime. The comparison of mean and volatility of different regimes and the one-step ahead predictions of the regime probabilities for different countries revealed the labor market specifics for each country and showed differences in the flexibility of their reactions to changing economic environment.