Unemployment Hysteresis in the “Nordic Kitten”: Evidence from Five Estonian Regions

Unemployment hysteresis is a much discussed and researched topic in macroeconomics. The present paper examined unemployment hysteresis in five Estonian regions. It used two panel data methods, namely, the Im- Pesaran-Shin (IPS) test and the Fourier Im-Pesaran-Shin (FIPS) test. The originality and value of this paper is that this is the first study that uses the panel unit root tests to examine unemployment dynamics in the Estonian regions. The findings revealed that the unemployment rates in the Estonian regions could be best described as a stationary process. This result is in line with the natural rate hypothesis. A research implication is that this study has illustrated that nonlinear tests could be an appropriate approach to examine unemployment hysteresis because other methods may fail to reject the null hypothesis. A practical implication of this study is that it sheds light on the nature of unemployment dynamics in Estonia at the regional level. As the findings revealed, the unemployment rates in the Estonian regions had the mean-reversion property. Therefore, the higher-than-normal unemployment rates are likely to return to the natural level even in the absence of intervention policies initiated by the government or policy makers. Key words: Unemployment hysteresis, Estonia, Panel unit root test, Regional economies.JEL: C22, E24.