HYSTERESIS IN UNEMPLOYMENT: NEW EVIDENCE FROM 19 EURO AREA COUNTRIES

Year 2020, Volume: 4 Issue: 7, 101 - 124, 31.12.2020

Onur Özdemir

Abstract

This paper utilizes the degree of permanent effects in unemployment rates using a wide array of unit-root testing methods for 19 Euro Area countries over the 1983M1-2019M7 period. First and foremost, we examine the theoretical context of linear hysteresis through the implementation of univariate unit-root tests. Since this may contain some potential issues, we also take into account the presence of structural breaks in unemployment. Moreover, we quantify the initial results within the context of panel unit-root tests whether the hysteresis effects in unemployment are still prevailing for the sample. Our findings show that, in general, we cannot reject the hysteresis hypothesis for the 19 Euro Area countries against the alternative of a natural rate even after controlling for structural breaks. The results are thus compatible with the views on the existence of path-dependence of steady-state equilibrium unemployment.

Keywords

Hysteresis, Unemployment, Univariate Unit-Root Test, Panel Unit-Root Test, Structural Break

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