Korea's Natural Rate of Unemployment: Estimates and Assessment

This paper estimates Korea's natural rate of unemployment using various estimation methods such as pure time-series methods, reduced-form methods, and structural form methods, with discussion about relative advantages and disadvantages of each estimation method. This paper also provides the confidence interval of the estimated natural rate of unemployment by the Monte Carlo integration method. Though multivariate unobserved component model exhibits better performance in many aspects than other estimation methods, awareness should be raised for a potential misspecification problem of a multivariate unobserved component model. Considering that each method has its own advantages and disadvantages, it is recommended to make an inference on the natural rate of unemployment based on common results among various methods. Korea's natural rate of unemployment was estimated to be around 3.8~4.0% on average in the period of 1979:Ⅰ~1987:Ⅳ, and to decline to 2.5~2.9% in the period of 1988:Ⅰ～1997:Ⅳ. During the Asian crisis, it is estimated to peak at near 4.8% and to have been on a downward trend since then