Hysteresis in Unemployment: Evidence from OECD Countries

Abstract

The natural rate of unemployment is the equilibrium unemployment rate. If the_x000D_ actual unemployment rate does not fluctuate around some “natural” rate, it is_x000D_ implied that the unemployment rate may follow a non-stationary process. Existing_x000D_ studies using the conventional ADF unit-root test generally fail to reject the null_x000D_ hypothesis of a unit root in the unemployment rate. These findings have been_x000D_ interpreted as providing support for the hysteresis hypothesis. In this paper, we_x000D_ analyze a panel of unemployment rate series of OECD countries by employing a_x000D_ more powerful test which exploits the cross-section variations in the constituent_x000D_ series. An important issue that we consider concerns the appropriate critical values_x000D_ for the panel data unit-root test in the presence of serial correlation and_x000D_ contemporaneous correlation. The critical values are computed from bootstrapping_x000D_ simulations. We support the hysteresis hypothesis of the unemployment rate series of_x000D_ OECD countries.