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

  • Hans-Martin Krolzig
  • Massimiliano Marcellino
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    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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    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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    Web page: http://www.economics.ox.ac.uk/
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