Current Methods and Applications in Econometrics

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DOI :10.26650/B/SS10.2021.013.04   IUP :10.26650/B/SS10.2021.013.04    Full Text (PDF)

Are Shocks to Unemployment Rate in OECD Countries Permanent or Temporary? Evidence From Unit Root Tests With Non-Normal Errors

Mücahit Aydın, Mehmet Aydın

In this paper, we tested the validity of unemployment hysteresis for the 21 Organisation for Economic Cooperation and Development (OECD) countries in the 1990Q1–2017Q3 period using recently developed unit root tests with structural breaks and non-normal errors. There are three different economic approaches to unemployment in the literature: natural-rate hypothesis, structuralist hypothesis, and unemployment hysteresis. Overall, we found support for unemployment hysteresis in 11 of the 21 OECD countries (Australia, Canada, Spain, Finland, France, Italy, Japan, Mexico, Norway, Portugal and Sweden). According to this hypothesis, shocks on unemployment have a permanent effect, and unemployment rates have no tendency to revert to a steady state in the long run. Conversely, the hysteresis hypothesis was rejected for 10 of the 21 OECD countries (Belgium, Chile, Denmark, Ireland, Korea, Luxemburg, Netherlands, New Zealand, the United Kingdom, and the United States) in at least one unit root test. We found the structuralist hypothesis in all 10 of these countries, whereas we could not find the natural-rate hypothesis.


Keywords: Unemployment hysteresis, RALS, unit root tests, OECD countries, structural breaks

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