The Beveridge Curve and the Matching Function: Indicators of Normalization in the Latvian Labour Market

The extent to which stability or “normalization” has prevailed in the Latvian labour market is assessed. By introducing the concept of the Beveridge curve to Latvian data it is shown that the Latvian economy during the Russian crisis responded textbook-wise. Estimation of a matching function yields a robust result displaying a secular increase in matching efficiency, which is interpreted as one piece of normalization: In Soviet times matching was largely characterized by assignment of jobs, whereas in the market economy matching is related to search. The former regime was not immediately substituted by the latter. The interim period, transition, has seen a gradual movement towards a market economy labour market. The data reveals increased efficiency of that emerged search process. This is evidence of normalization of the Latvian labour market.