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Unemployment Hysteresis in G7 Countries: Linear and Nonlinear Evidence

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  • Havva Koç

Abstract

The unemployment hysteresis hypothesis suggests that macroeconomic shocks may generate persistent effects on unemployment rates. This study investigates the validity of unemployment hysteresis in G7 countries by accounting for linearity, structural breaks, and nonlinear adjustment dynamics. Monthly, seasonally adjusted unemployment rates covering January 2000–December 2024 are analyzed. Linearity is first examined using the Harvey et al. (2008) test, which identifies nonlinear dynamics in Canada and Italy, while unemployment series in the remaining G7 countries display linear behavior. For linear cases, stationarity is assessed using the Augmented Dickey–Fuller (ADF), Phillips–Perron (PP), and Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests, together with Perron (1989) and Zivot–Andrews (1992) tests allowing for structural break. Nonlinear series are analyzed using the Kapetanios–Shin–Snell (KSS), Kruse (2011), and Hepsag (2021) tests. The results indicate persistent unemployment in linear economies, nonlinear mean reversion in Canada, and strong hysteresis in Italy, highlighting heterogeneous unemployment dynamics across G7 countries.

Suggested Citation

  • Havva Koç, 2026. "Unemployment Hysteresis in G7 Countries: Linear and Nonlinear Evidence," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 11(1), pages 160-178.
    • Handle: RePEc:ahs:journl:v:11:y:2026:i:1:p:160-178
    DOI: 10.30784/epfad.1860816
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    References listed on IDEAS

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    1. Edmund S. Phelps, 1999. "Behind This Structural Boom: The Role of Asset Valuations," American Economic Review, American Economic Association, vol. 89(2), pages 63-68, May.
    2. Phelps, Edmund S, 1992. "A Review of Unemployment," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1476-1490, September.
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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