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Can the Insider-Outsider Theory Explain Unemployment Hysteresis in OECD Countries?

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  • Dimitrios Bakas
  • Yousef Makhlouf

Abstract

The insider-outsider theory has been commonly used to explain the hysteretic behaviour of unemployment. However, there is no empirical evidence about the validity of insiders’ power on explaining the persistence of unemployment. This paper, using panel unit root tests that allow for the presence of covariates, addresses this gap and examines whether the insider-outsider theory, by means of various labour market proxies, can explain the hysteresis hypothesis for the OECD countries over 1960-2013. Our results show that although unemployment rate exhibits a pronounced hysteretic behaviour in OECD countries, this behaviour is reversed once we consider the insider-outsider proxies as covariates. This validates the role of insiders’ power as a key source of unemployment hysteresis.

Suggested Citation

  • Dimitrios Bakas & Yousef Makhlouf, 2017. "Can the Insider-Outsider Theory Explain Unemployment Hysteresis in OECD Countries?," NBS Discussion Papers in Economics 2017/07, Economics, Nottingham Business School, Nottingham Trent University.
    • Handle: RePEc:nbs:wpaper:2017/07
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    Cited by:

    1. Abdoulaye Millogo, 2020. "Hysteresis Effects and Macroeconomics Gains from Unconventional Monetary Policies Stabilization," Cahiers de recherche 20-12, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    2. Fumitaka Furuoka, 2021. "Testing hysteresis in unemployment using artificial network (ANN) unit root test," Economics Bulletin, AccessEcon, vol. 41(3), pages 1947-1958.

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    More about this item

    Keywords

    Insider-outsider theory; Hysteresis; Unemployment; Panel unit root tests;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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