Unemployment Hysteresis: Attached or Mismatched?

Authors

  • Onur Özdemir

DOI:

https://doi.org/10.47743/saeb-2021-0005

Keywords:

hysteresis, unemployment rate, individual unit-root test, panel unit-root test, structural break

Abstract

This paper investigates the empirical significance of the unemployment problem whether it is structural or temporary on the basis of region-based, income-based and aggregate classifications of different countries for the yearly data from 1991 to 2018. In the first part of the paper, we examine the stationary position of unemployment series by way of using individual unit-root tests. Since the series are possibly subjected to the structural breaks, we also use additional approaches in which the effects of the break dates are checked in the analysis. Furthermore, we compare the initial findings of univariate unit-root tests along with panel unit-root testing procedures to critically assess the statistical validity of the hysteresis hypothesis in unemployment for given samples. The empirical findings imply that we cannot reject the hysteresis hypothesis for different classifications of the countries against the alternative of a natural rate even in the presence of structural breaks.

JEL Codes - C10; E20; E24

References

Akay, H. K., Nargeleçekenler, M., and Yılmaz, F., 2011. Hysteresis in Unemployment: Evidence from 23 OECD Countries. Economický časopis, 59(5), 488-505.

Akdogan, K., 2017. Unemployment Hysteresis and Structural Change in Europe. Empirical Economics, 53(4), 1415-1440. http://dx.doi.org/10.1007/s00181-016-1171-8

Ayala, A., Cunado, J., and Gil-Alana, L. A., 2012. Unemployment Hysteresis: Empirical Evidence for Latin America. Journal of Applied Econometrics, 15(2), 213-233. http://dx.doi.org/10.1016/S1514-0326(12)60010-5

Bai, J., and Ng, S., 2004. A Panic Attack on Unit Roots and Cointegration. Econometrica, 72(4), 1127-1177. http://dx.doi.org/10.1111/j.1468-0262.2004.00528.x

Ball, L. M., 2009. Hysteresis in Unemployment: Old and New Evidence. NBER Working Paper, 14818. http://dx.doi.org/10.3386/w14818

Ball, L. M., 2014. Long-Term Damage from the Great Recession in OECD Countries. European Journal of Economics and Economic Policies: Intervention, 11(2), 149-160. http://dx.doi.org/10.3386/w20185

Ball, L. M., and Mankiw, G. N., 2002. The NAIRU in Theory and Practice. The Journal of Economic Perspectives, 16(4), 115-136. http://dx.doi.org/10.1257/089533002320951000

Ball, L. M., Mankiw, N. G., and Nordhaus, W. D., 1999. Aggregate Demand and Long-Run Unemployment. Brookings Papers on Economic Activity, 2, 189-251. http://dx.doi.org/10.2307/2534680

Bechny, J., 2019. Unemployment Hysteresis in the Czech Republic. Prague Economic Papers, 28(5), 532-546. http://dx.doi.org/10.18267/j.pep.709

Berger, D., 2012. Countercyclical Restructuring and Jobless Recoveries. 2012 Meeting Paper, No. 1179: Society for Economics Dynamics.

Blanchard, O. J., 2003. Monetary Policy and Unemployment. Remarks at the Conference Monetary Policy and the Labor Market. A Conference in Honor of James Tobin, Held at the New School, November 2002.

Blanchard, O. J., Cerutti, E., and Summers, L. H., 2015. Inflation and Activity – Two Explorations and their Monetary Policy Implications. IMF Working Paper, WP/15/230.

Blanchard, O. J., and Summers, L. H., 1986a. Hysteresis and the European Unemployment Problem. NBER Working Paper, 1950. http://dx.doi.org/10.3386/w1950

Blanchard, O. J., and Summers, L. H., 1986b. Hysteresis in Unemployment. NBER Working Paper, 2035. http://dx.doi.org/10.3386/w2035

Choi, I., 2001. Unit Root Tests for Panel Data. Journal of International Money and Finance, 20(2), 249-272. http://dx.doi.org/10.1016/S0261-5606(00)00048-6

Christopoulos, D. K., and Leόn-Ledesma, M. A., 2007. Unemployment Hysteresis in EU Countries: What Do We Really Know About It? Journal of Economic Studies (Glasgow, Scotland), 34(2), 80-89. http://dx.doi.org/10.1108/01443580710745353

Clemente, J., Montanes, A., and Reyes, M., 1998. Testing for a Unit Root in Variables with a Double Change in the Mean. Economics Letters, 59(2), 175-182. http://dx.doi.org/10.1016/S0165-1765(98)00052-4

DeJong, D. N., Nankervis, J. C., Savin, N. E., and Whiteman, C. H., 1992. The Power Problems of Unit Root Tests in Time Series with Autoregressive Errors. Journal of Econometrics, 53(1-3), 323-343. http://dx.doi.org/10.1016/0304-4076(92)90090-E

Dickey, D. A., and Fuller, W. A., 1979. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74(366), 427-431. http://dx.doi.org/10.2307/2286348

Dickey, D. A., and Fuller, W. A., 1981. Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49(4), 1057-1072. http://dx.doi.org/10.2307/1912517

Draghi, M., 2014. Unemployment in the Euro Area. Paper presented at the Annual Central Bank Symposium in Jackson Hole.

Ewing, J. A., 1881. Effects of Stress on the Thermoelectric Quality of Metals Part 1. Proceedings of the Royal Society of London. London: Royal Society of London.

Fisher, R. A., 1932. Statistical Methods for Research Workers (4th ed. ed.): Oliver & Boyd.

Friedman, M., 1967. The Monetary Theory and Policy of Henry Simons. The Journal of Law & Economics, 10, 1-13. http://dx.doi.org/10.1086/466628

Friedman, M., 1968. The Role of Monetary Policy. The American Economic Review, 58(1), 1-17.

Galí, J., 2015. Hysteresis and the European Unemployment Problem Revisited. NBER Working Paper, 21430. http://dx.doi.org/10.3386/w21430

Gottfries, N., and Horn, H., 1987. Wage Formation and the Persistence of Unemployment. Economic Journal (London), 97(388), 877-884. http://dx.doi.org/10.2307/2233077

Hadri, K., 2000. Testing for Stationarity in Heterogeneous Panel Data. The Econometrics Journal, 3(2), 148-161. http://dx.doi.org/10.1111/1368-423X.00043

Hall, R. E., 2005. Employment Fluctuations with Equilibrium Wage Stickiness. The American Economic Review, 95(1), 50-65. http://dx.doi.org/10.1257/0002828053828482

Harris, R., and Tzavalis, E., 1999. Inference for Unit Roots in Dynamic Panels where the Time Dimension is Fixed. Journal of Econometrics, 91(2), 201-226. http://dx.doi.org/10.1016/S0304-4076(98)00076-1

Hlouskova, J., and Wagner, M., 2006. The Performance of Panel Unit Root and Stationary Tests: Results from a Large Scale Simulation Study. Econometric Reviews, 25(1), 85-116. http://dx.doi.org/10.1080/07474930500545504

Im, K. S., Pesaran, M. H., and Shin, Y., 2003. Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53-74. http://dx.doi.org/10.1016/S0304-4076(03)00092-7

Jaimovich, N., and Siu, H., 2012. Job Polarization and Jobless Recoveries. NBER Working Paper, 18334. http://dx.doi.org/10.3386/w18334

Jump, R. C., and Stockhammer, E., 2018. New Evidence on Unemployment Hysteresis in the EU. mimeo.

Kienzler, D., and Schmid, K. D., 2014. Hysteresis in Potential Output and Monetary Policy. Scottish Journal of Political Economy, 61(4), 371-396. http://dx.doi.org/10.1111/sjpe.12050

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., and Shin, Y., 1992. Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root? Journal of Econometrics, 54(1-3), 159-178. http://dx.doi.org/10.1016/0304-4076(92)90104-Y

Layard, R., Nickell, S., and Jackman, R., 1991. Unemployment: Macroeconomic Performance and the Labour Market: Oxford University Press.

Lee, C. C., and Chang, C. P., 2008. Unemployment Hysteresis in OECD Countries: Centurial Time Series Evidence with Structural Breaks. Economic Modelling, 25(2), 312-325. http://dx.doi.org/10.1016/j.econmod.2007.06.002

Levin, A., Lin, C. F., and Chu, C., 2002. Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties. Journal of Econometrics, 108(1), 1-24. http://dx.doi.org/10.1016/S0304-4076(01)00098-7

Leόn-Ledesma, M. A., 2000. Unemployment Hysteresis in the US and the EU: A Panel Data Approach. Studies in Economics, 0006.

Leόn-Ledesma, M. A., 2002. Unemployment Hysteresis in the US States and the EU: A Panel Approach. Bulletin of Economic Research, 54(2), 95-103. http://dx.doi.org/10.1111/1467-8586.00141

Leόn-Ledesma, M. A., and McAdam, P., 2004. Unemployment, Hysteresis and Transition. Scottish Journal of Political Economy, 51(3), 377-401. http://dx.doi.org/10.1111/j.0036-9292.2004.00311.x

Lindbeck, A., 1993. Unemployment and Macroeconomics: The MIT Press.

Lindbeck, A., and Snower, D. J., 1989. The Insider-Outsider Theory of Employment and Unemployment: The MIT Press.

Lindbeck, A., and Snower, D. J., 2001. Insiders versus Outsiders. The Journal of Economic Perspectives, 15(1), 165-188. http://dx.doi.org/10.1257/jep.15.1.165

Lumsdaine, R. L., and Papell, D., 1997. Multiple Trend Breaks and the Unit-Root Hypothesis. The Review of Economics and Statistics, 79(2), 212-218. http://dx.doi.org/10.1162/003465397556791

Maddala, G. S., and Wu, S., 1999. A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test. Oxford Bulletin of Economics and Statistics, 61, 631-652. http://dx.doi.org/10.1111/1468-0084.0610s1631

Mednik, M., Rodriguez, C. M., and Ruprah, I. J., 2012. Hysteresis in Unemployment: Evidence from Latin America. Journal of International Development, 24(4), 448-466. http://dx.doi.org/10.1002/jid.1755

Mikhail, O., Eberwein, C. J., and Handa, J., 2003. The Measurement of Persistence and Hysteresis in Aggregate Unemployment. Economics Department College of Business and Administration University of Central Florida, Faculty Working Papers, 03-36.

Mitchell, W. F., 1993. Testing for Unit Roots and Persistence in OECD Unemployment Rates. Applied Economics, 25(12), 1489-1501. http://dx.doi.org/10.1080/00036849300000153

Mitchell, W. F., and Muysken, J., 2008. Full Employment Abandoned: Shifting Sands and Policy Failures: Edward Elgar. http://dx.doi.org/10.4337/9781848441422

Modigliani, F., 2003. The Keynesian Gospel According to Modigliani. The American Economist, 47(1), 3-24. http://dx.doi.org/10.1177/056943450304700101

Newey, W. K., and West, K. D., 1987. A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica, 55(3), 703-708. http://dx.doi.org/10.2307/1913610

Nickell, S., 1997. Unemployment and Labor Market Rigidities: Europe versus North America. The Journal of Economic Perspectives, 11(3), 55-74. http://dx.doi.org/10.1257/jep.11.3.55

OECD, 2017. OECD Employment Outlook 2017: OECD Publishing.

Phelps, E. S., 1967. Phillips Curves, Expectations of Inflation and Optimal Unemployment Over Time. Economica, 34(135), 254-281. http://dx.doi.org/10.2307/2552025

Phelps, E. S., 1968. Money-Wage Dynamics and Labor-Market Equilibrium. Journal of Political Economy, 76(4), 678-711. http://dx.doi.org/10.1086/259438

Phelps, E. S., 1972. Inflation Policy and Unemployment Theory: The Cost-Benefit Approach to Monetary Planning: W. W. Norton & Company.

Phelps, E. S., 1994. Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interests and Assets: Harvard University Press.

Phelps, E. S., 1999. Behind This Structural Boom: The Role of Asset Valuations. The American Economic Review, 89(2), 63-68. http://dx.doi.org/10.1257/aer.89.2.63

Phillips, P. C. B., and Perron, P., 1988. Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335-346. http://dx.doi.org/10.1093/biomet/75.2.335

Pikoko, V., and Phiri, A., 2018. Is There Hysteresis in South African Unemployment? Evidence from the Post-Recessionary Period. MPRA Paper, 83962.

Pissarides, C. A., 1992. Loss of Skill During Unemployment and the Persistence of Employment Shocks. The Quarterly Journal of Economics, 107(4), 1371-1391. http://dx.doi.org/10.2307/2118392

Pissarides, C. A., 2017. Equilibrium Unemployment Theory: The MIT Press.

Roberts, J. M., and Morin, N. J., 1999. Is Hysteresis Important for U.S. Unemployment? Finance and Economics Discussion Series, 56.

Røed, K., 1997. Hysteresis in Unemployment. Journal of Economic Surveys, 11(4), 389-418. http://dx.doi.org/10.1111/1467-6419.00040

Saatcioglu, C., and Korap, L., 2007. Turkish Money Demand, Revisited: Some Implications for Inflation and Currency Substitution Under Structural Breaks. Boğaziçi Journal, 21(1-2), 107-124. http://dx.doi.org/10.21773/boun.21.1.7

Sachs, J. D., 1986. High Unemployment in Europe: Diagnosis and Policy Implications. NBER Working Paper, 1830.

Samuelson, P. A., 1965. Some Notions on Causality and Teleology in Economics. In D. Lerner (Ed.), Cause and Effect (pp. 99-144): The Free Press.

Schwert, W. G., 1989. Tests for Unit Roots: A Monte Carlo Investigation. Journal of Business & Economic Statistics, 7(2), 147-159.

Sessions, J. G., 1994. Unemployment Stigma and Multiple Labour Market Equilibria: A Social-Psychological Interpretation of Hysteresis. Labour, 8(3), 355-376. http://dx.doi.org/10.1111/j.1467-9914.1994.tb00168.x

Shimer, R., 2005. The Cyclical Behavior of Equilibrium Unemployment and Vacancies. The American Economic Review, 95(1), 25-49. http://dx.doi.org/10.1257/0002828053828572

Shimer, R., 2012. Wage Rigidities and Jobless Recoveries. Journal of Monetary Economics, 59, S65-S77. http://dx.doi.org/10.1016/j.jmoneco.2012.10.024

Skott, P., 2005. Fairness as a Source of Hysteresis in Employment and Relative Wages. Journal of Economic Behavior & Organization, 57(3), 305-331. http://dx.doi.org/10.1016/j.jebo.2003.11.011

Song, F., and Wu, Y., 1998. Hysteresis in Unemployment: Evidence from OECD Countries. The Quarterly Review of Economics and Finance, 38(2), 181-192. http://dx.doi.org/10.1016/S1062-9769(99)80111-2

Stockhammer, E., 2011. Wage Norms, Capital Accumulation, and Unemployment: A Post-Keynesian View. Oxford Review of Economic Policy, 27(2), 295-311. http://dx.doi.org/10.1093/oxrep/grr013

Waheed, M., Alam, T., and Ghauri, S. P., 2006. Structural Breaks and Unit Root: Evidence from Pakistani Macroeconomic Time Series. MPRA Paper, 1797.

Wiczer, D., 2013. Long-Term Unemployment: Attached and Mismatched? 2013 Meeting Paper, No. 1101: Society for Economic Dynamics.

Zivot, E., and Andrews, D. W. K., 1992. Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis. Journal of Business & Economic Statistics, 10(3), 251-270.

Downloads

Published

2021-03-22

How to Cite

Özdemir, O. (2021). Unemployment Hysteresis: Attached or Mismatched?. Scientific Annals of Economics and Business, 68(1), 1–24. https://doi.org/10.47743/saeb-2021-0005

Issue

Section

Articles