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Unemployment hysteresis and the NAIRU: a ratchet model

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  • David Smyth
  • Joshy Easaw

Abstract

In the 1970s and 1980s the USA and European economies experienced unemployment rates that persistently drifted upwards. The present paper captures this phenomenon by a simple extension of the hysteresis approach to the natural rate hypothesis of unemployment using a ratchet model. The impact of peak unemployment levels on unemployment hysteresis is incorporated using a traditional ratchet model. The model is estimated for the USA economy for the period 1948 to 1998. The results indicate that the relationship approximates a full hysteresis effect for peak-to-peak unemployment levels.

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  • David Smyth & Joshy Easaw, 2001. "Unemployment hysteresis and the NAIRU: a ratchet model," Applied Economics Letters, Taylor & Francis Journals, vol. 8(6), pages 359-362.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:6:p:359-362
    DOI: 10.1080/135048501750237775
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    References listed on IDEAS

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    1. Bianchi, Marco & Zoega, Gylfi, 1997. "Challenges facing natural rate theory," European Economic Review, Elsevier, vol. 41(3-5), pages 535-547, April.
    2. Robert J. Gordon, 1988. "Back to the Future: European Unemployment Today Viewed from America in 1939," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 271-312.
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    Cited by:

    1. T. D. Stanley, 2004. "Does unemployment hysteresis falsify the natural rate hypothesis? a meta‐regression analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 18(4), pages 589-612, September.
    2. Tsangyao Chang & Kuei-Chiu Lee & Chien-Chung Nieh & Ching-Chun Wei, 2005. "An empirical note on testing hysteresis in unemployment for ten European countries: panel SURADF approach," Applied Economics Letters, Taylor & Francis Journals, vol. 12(14), pages 881-886.
    3. Thierry Warin, 2006. "From Full Employment to the Natural Rate of Unemployment: A Survey," Middlebury College Working Paper Series 0601, Middlebury College, Department of Economics.

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