This economic policy paper proposes a distinct method to measure the level of Νairu following Punnoose Jacob et al, 2018. In Cyprus, the upswing of Nairu level seems to be a side effect of the financial crisis that hit Cyprus during 2012-2014. Furthermore, the different types of unemployment can be analyzed depending on unemployment by duration. This can help estimate the Nairu by focusing on the duration of unemployment adjusted for frictional, cyclical-seasonal and structural unemployment.
It is important to know that the Nairu ensures that in a given time, inflation would not be higher than the price level needed to keep steady inflationary expectations and thus retain macroeconomic stability.
The analysis contrasts two different periods; amid the financial crisis period 2012-2014 and the post crisis period 2015-2017. The Nairu and the Natural rate of unemployment (Nru) estimations are based on data from the Labour Force Survey (LFS) and the registered unemployed database.
Moreover, the increase of the Nairu can be also approached by estimating the loss in total Gross Value Added (GVA) in the reference period by focusing upon the labour intensive sectors exhibiting how productive labour varied as a result of the effects of the financial crisis.
The results of the essay show that as the Cyprus economy is gradually returning to its pre-crisis levels, the Nairu is pursuing a downward path towards a steady state long run equilibrium.