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A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market

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  • Hans-Martin Krolzig
  • Massimiliano Marcellino
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    Abstract

    There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. Our aim is to propose a statistical model that offers a congruent representation of post-war UK labour market. We use a cointegrated vector autoregressive Markov-switching model where some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component. The long run dynamics are characterized by two cointegrating vectors: trend-adjusted labour productivity and the labour share. Despite there having been many changes affecting this sector of the UK economy, they Markov-switching vector-equilibrium-correction model with three regimes representing recession, growth and high growth provides a good characterization of the sample data over the period 1966(3)-1993(1) In an out-of-sample forecast experiment over the period 1991(2)-1993(1) it beats linear and non-linear model alternatives. The results of an impulse-response highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established.

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    File URL: http://www.nuff.ox.ac.uk/economics/papers/2000/w37/KMM.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2000-W37.

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    Date of creation: 01 Nov 2000
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    Handle: RePEc:oxf:wpaper:2000-w37

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    Related research

    Keywords: Business Cycles; Employment; Impulse-Response Analysis; Cointegration; Regime Shifts; Markov Switching;

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    Cited by:
    1. Martin R. West & Ludger Woessmann, 2010. "'Every Catholic Child in a Catholic School': Historical Resistance to State Schooling, Contemporary Private Competition and Student Achievement across Countries," Economic Journal, Royal Economic Society, vol. 120(546), pages F229-F255, 08.
    2. Mohammad Niaz Asadullah, 2006. "Educational Disparity in East and West Pakistan, 1947–71: Was East Pakistan Discriminated Against?," Oxford University Economic and Social History Series _063, Economics Group, Nuffield College, University of Oxford.
    3. James Malcomson & Martin Chalkley, 2001. "Cost Sharing in Health Service Provision: An Empirical Assessment of Cost Savings," Economics Series Working Papers 69, University of Oxford, Department of Economics.
    4. Camilla Brautaset & Regina Grafe, 2006. "The Quiet Transport Revolution: Returns to scale, scope and network density in Norway's nineteenth-century sailing fleet," Oxford University Economic and Social History Series _062, Economics Group, Nuffield College, University of Oxford.
    5. Jane Humphries & Tim Leunig, 2007. "Cities, Market Integration and Going to Sea: Stunting and the Standard of Living in Early Nineteenth-Century England and Wales," Economics Series Working Papers 2007-W66, University of Oxford, Department of Economics.

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