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Hysteresis in unemployment: evidence from OECD estimates of the natural rate

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  • Ball, Laurence
  • Onken, Joern

Abstract

This paper studies the dynamics of unemployment (u) and its natural rate (u*), with u* measured by real-time estimates for 29 countries from the OECD. We find strong evidence of hysteresis: an innovation in u causes u* to change in the same direction, and therefore has permanent effects. For our baseline specification, a one percentage point deviation of u from u* for one year has a long-run effect of 0.16 points on both variables. When we allow asymmetry, we find, perhaps surprisingly, that decreases in u have larger long-run effects than increases in u. JEL Classification: E24

Suggested Citation

  • Ball, Laurence & Onken, Joern, 2021. "Hysteresis in unemployment: evidence from OECD estimates of the natural rate," Working Paper Series 2625, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20212625
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    1. Paternesi Meloni, Walter & Romaniello, Davide & Stirati, Antonella, 2022. "Inflation and the NAIRU: assessing the role of long-term unemployment as a cause of hysteresis," Economic Modelling, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    high-pressure economy; hysteresis; natural rate; unemployment;
    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

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