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Hysteresis without Hope: investigating unemployment persistence in South Africa

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

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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". �

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