Hysteresis without Hope: investigating unemployment persistence in South Africa

Dadam, Vincent and Viegi, Nicola (2021): Hysteresis without Hope: investigating unemployment persistence in South Africa.

Abstract

This paper investigates hysteresis in South Africa's unemployment. First we test the presence of hysteresis in unemployment both by traditional stationarity tests and by us- ing non-linear transformation methods to identify two further characteristics of hysteresis, namely remanence and selective memory. In the second part of the paper we estimate a simple insider-outsider model using a Bayesian VAR methodology to identify the shocks driving the unemployment dynamics. The main �nding is that shocks to nominal wages and mark-up shocks as the main drivers of unemployment. Demand shocks do not play a dominant role. These results point to the di�culty of absorbing the current level of unemployment without signi�cant positive shocks in market structure and wage setting behaviour. The strong hysteresis present in the data shows that this excessive level of un- employment can become "equilibrium": the South African labour market presents features of the worst kind of hysteresis, a hysteresis without "hope". �

• Item Type: MPRA Paper
• Language: English
• Keywords: hysteresis, unemployment, South Africa
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Blanchard, O. J. and D. Quah (1989). The dynamic e�ects of aggregate demand and supply disturbances. The American Economic Review 79 (4), 655{673. Blanchard, O. J. and L. H. Summers (1987). Hysteresis in unemployment. European Economic Review 31 (1-2), 288{295. Cross, R., M. Grinfeld, and H. Lamba (2009). Hysteresis and economics. IEEE Control Systems Magazine 29 (1), 30{43. Darby, J., A. H. Hallett, J. Ireland, and L. Piscitelli (1999). The impact of exchange rate uncertainty on the level of investment. The Economic Journal 109 (454), 55{67. Dolado, J. J. and J. F. Jimeno (1997). The causes of spanish unemployment: A structural var approach. European Economic Review 41 (7), 1281{1307. Gal��, J. (2015). Hysteresis and the european unemployment problem revisited. Technical report, National Bureau of Economic Research. Gal��, J. (2020). Insider-outsider labor markets, hysteresis and monetary policy. Technical report, National Bureau of Economic Research. Gambetti, L. and B. Pistoresi (2004). Policy matters. the long run e�ects of aggregate demand and mark-up shocks on the italian unemployment rate. Empirical Economics 29 (2), 209{226. Garga, V. and S. R. Singh (2021). Output hysteresis and optimal monetary policy. Journal of Monetary Economics 117, 871{886. Maidorn, S. (2003). The e�ects of shocks on the austrian unemployment rate{a structural var approach. Empirical Economics 28 (2), 387{402. O'Shaughnessy, T. (2011). Hysteresis in unemployment. Oxford Review of Economic Pol- icy 27 (2), 312{337. Piscitelli, L., R. Cross, M. Grinfeld, and H. Lamba (2000). A test for strong hysteresis. Computational Economics 15 (1), 59{78.