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Unemployment Hysteresis and Structural Change in Europe

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  • Kurmas Akdogan

Abstract

We examine the unemployment hysteresis hypothesis for 31 European countries, US and Japan, using alternative linear and nonlinear unit root tests, taking into account possible structural breaks. Two types of smooth transition models - Exponential Smooth Transition Autoregressive (ESTAR) and Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) - are employed to account for the nonlinear mean-reverting behavior in unemployment due to heterogeneity in hiring and firing costs across firms. Four main results emerge: First, the hysteresis hypothesis is rejected for 60 percent of the countries in our sample. Second, nonlinear models capture the asymmetries in unemployment dynamics over the business cycle for some countries. Third, many of the series display multiple structural breaks which might point out shifts in mean level of unemployment. Fourth, forecasting powers of our nonlinear models display poor performance against the linear AR specification. The results have policy implications for the debate on the benefits of demand or supply side policies for tackling the current unemployment problem in Europe.

Suggested Citation

  • Kurmas Akdogan, 2016. "Unemployment Hysteresis and Structural Change in Europe," Working Papers 1618, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1618
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    More about this item

    Keywords

    Unemployment hysteresis; Nonlinear adjustment; Structural breaks; Forecasting;
    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
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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