Did the crisis permanently scar the Portuguese labour market? Evidence from a Markov-switching Beveridge curve analysis

In this paper we analyse to what extent the outward shift in the Portuguese Beveridge curve since 2007 has been due to structural or cyclical factors and how likely the outward shift will persist. We do this by empirically estimating the Beveridge curve in a Markov-switching panel setting with time-varying transition probabilities for the US, Portugal and Spain using monthly data for the period 1986m1-2014m12. These time-varying transition probabilities are in turn determined by a set of structural indicators which could affect the matching efficiency in the labour market. The results show that the sharp outward shift in the Portuguese Beveridge curve was to a large extent driven by cyclical factors. However, it was compounded by some structural factors, namely, the relatively high level of employment protection together with the relatively high minimum wage ratio and the relatively generous unemployment benefit system.