Level of mismatch unemployment in Finland

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School of Business | Master's thesis
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The matching function describes how the job seekers match with the open vacancies in the labor market. Mismatch is a concept that is used to describe the compatibility between job seekers and open vacancies. Often, as in this thesis, unemployed job seekers represent the job seekers in the labor market. Simultaneous high unemployment rates and labor shortage usually raises the question on whether or not there is high level of mismatch unemployment in the labor market. Mismatch can arise from occupational, regional and sectoral heterogeneities between unemployed job seekers and open vacancies. When there is high level of mismatch in the labor market the matching is inefficient. This thesis reviews relevant research methods to study matching efficiency and mismatch in the labor market. The Beveridge curve and the matching model are often used to study these issues. The focus is on the Finnish labor market that has experienced high rates of unemployment with simultaneously increasing vacancy rates. This thesis reviews recent studies on the topic and contributes to the literature by calculating three different mismatch indices for years 2006-2018. Findings show that the regional mismatch has decreased during the reference period. The decrease in level of regional mismatch varies from 10 to 55 percent. According to these results, regional heterogeneities in the market has not been the reason for high unemployment. If the labor market was at regional balance, the unemployment would be 3 percent lower. Occupational mismatch has increased by 4 to 22 percent depending on the index during the reference period. Optimal allocation of unemployed job seekers and open vacancies across the occupational groups would lower the observed unemployment by 8 percent. These indices have limitations and results should be interpreted with caution although the conclusions are in line with the recent studies. Mismatch indices are a good simple tool analyse the development of mismatch over time and complement the studies on labor market matching.
Thesis advisor
Ilmakunnas, Pekka
mismatch index, unemployment, mismatch unemployment, structural imbalance, structural unemployment, labor market
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