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Hysteresis in unemployment? Evidence from linear and nonlinear unit root tests and tests with non-normal errors

Author

Listed:
  • Ming Meng

    (Fifth Third Bank)

  • Mark C. Strazicich

    (Appalachian State University)

  • Junsoo Lee

    (University of Alabama)

Abstract

Hysteresis implies that shocks to unemployment have permanent effects. In this paper, we undertake a robust examination of the hysteresis hypothesis for 14 OECD countries by utilizing both linear and nonlinear unit root tests. After performing several linear unit root tests, we employ unit root tests with structural breaks and a Fourier test that allows for unknown breaks and nonlinear functional forms. To further examine the robustness of our findings, we additionally utilize tests that consider non-normal errors. Testing is undertaken using quarterly data for the time period 1983Q1–2013Q3. Overall, we find support for unit root hysteresis in 4 of the 14 countries, the traditional natural rate hypothesis in 3 countries, and the structuralist hypothesis (a natural rate with structural breaks) in 7 countries. In sum, we find that shocks to unemployment have permanent effects in 11 of the 14 countries, while the permanent effects are most often infrequent.

Suggested Citation

  • Ming Meng & Mark C. Strazicich & Junsoo Lee, 2017. "Hysteresis in unemployment? Evidence from linear and nonlinear unit root tests and tests with non-normal errors," Empirical Economics, Springer, vol. 53(4), pages 1399-1414, December.
    • Handle: RePEc:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1196-z
    DOI: 10.1007/s00181-016-1196-z
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    More about this item

    Keywords

    Unemployment; Hysteresis; Unit root test; Structural breaks; Fourier function; RALS;
    All these keywords.

    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

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