How to decode Unemployment Persistence: An econometric framework for identifying and comparing the sources of persistence

Møller, Niels Framroze (2016): How to decode Unemployment Persistence: An econometric framework for identifying and comparing the sources of persistence.

Abstract

Most econometric analyses of persistence focus on the existence of non-stationary unemployment but not the origin of this. The present research contains a multivariate econometric framework for identifying and comparing different sources of unemployment persistence (e.g. hysteresis versus a slowly moving equilibrium rate). A small example, considering historical data (1988-2006) for the UK, demonstrates how the method can be applied in practice. Although this primarily serves as an illustration, the evidence clearly suggests that persistence was due to a slowly moving equilibrium (driven by the price of crude oil) and not to hysteresis mechanisms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration, Equilibrium unemployment, Macroeconomic persistence, UK unemployment, Unemployment hysteresis
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; 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

References

Amable, B., J. Henry, F. Lordon, and R. Topol (1995). Hysteresis revisited. In R. Cross (Ed.), The Natural Rate of Unemployment: Reflections on 25 Years of the Hypothesis, Chapter 9. Cambridge University Press.

Amable, B. and K. Mayhew (Summer 2011). Unemployment in the oecd. Oxford Review of Economic Policy 27 (2), 207-220.

Andersen, T. (2010, 04). Unemployment persistence. CESifo Forum 11 (1), 23-28.

Arestis, P. and M. Sawyer (Eds.) (2009). Path Dependency and Macroeconomics. Palgrave Macmillan.

Ball, L. M. (2009). Hysteresis in unemployment: Old and new evidence. NBER Working Papers 14818, National Bureau of Economic Research, Inc.

Blanchard, O. (2006, 01). European unemployment: the evolution of facts and ideas. Economic Policy 21 (45), 5-59.

Blanchard, O. J. and J. Galí (2007, September). The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s? In International Dimensions of Monetary Policy, NBER Chapters, pp. 373-421. National Bureau of Economic Research, Inc.

Blanchard, O. J. and L. H. Summers (1986). Hysteresis and the european unemployment problem. NBER Macroeconomics Annual 1, 15-78.

Carlin, W. and D. Soskice (1990). Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate. Oxford University Press.

Carlin, W. and D. Soskice (2006). Macroeconomics: Imperfections, Institutions and Policies. Oxford University Press.

Danziger, D. (2008, 09). Adjustment costs, inventories and output. Scandinavian Journal of Economics 110 (3), 519-542.

Davidson, J. E. H. and S. G. Hall (1991). Cointegration in recursive systems. Economic Journal 101 (405), 239-51.

De Lee, J., C.-C. Lee, and C. P. Chang (2009). Hysteresis in unemployment revisited: Evidence from panel lm unit root tests with heterogeneous structural breaks. Bulletin of Economic Research 61 (4), 325-334.

Delong, J. B. and L. H. Summers (2012). Fiscal policy in a depressed economy. Brookings Papers on Economic Activity, 233-274.

Dennis, J. G., H. Hansen, and K. Juselius (2006). CATS in RATS. Cointegration analysis of time series, Version 2. Evanston, Illinois, USA: Estima.

Dickey, D. A. and W. Fuller (1981). The likelihood ratio statistics for autoregressive time series with unit root. Econometrica 49 (4), 1057-1072.

Dolado, J. J. and J. F. Jimeno (1997). The causes of spanish unemployment: A Structural VAR approach. European Economic Review 41 (7), 1281-1307.

Doornik, J. A. (2010). OxMetrics version 6.10.

Doornik, J. A. and D. F. Hendry (1998). Givewin. An Interface to Empirical Modelling. London: Timberlake Consultants Press.

Fudenberg, D. and J. Tirole (1983, December). Capital as a commitment: Strategic investment to deter mobility. Journal of Economic Theory 31 (2), 227-250.

Groth, C. (2009). Macroeconomic analysis. mimeo, Department of Economics, University of Copenhagen.

Gustavsson, M. and P. Österholm (2009). The presence of unemployment hysteresis in the OECD: what can we learn from out-of-sample forecasts? Empirical Economics.

Göcke, M. (2002). Various concepts of hysteresis applied in economics. Journal of Economic Surveys 16 (2), 167-188.

Hansen, H. and A.Warne (2001). The cause of Danish unemployment: Demand or supply shocks? Empirical Economics 26 (3), 461-486.

Holden, S. and R. Nymoen (2002). Measuring structural unemployment: NAWRU estimates in the nordic countries. Scandinavian Journal of Economics 104 (1), 87-104.

Jacobson, T., A. Vredin, and A. Warne (1997). Common trends and hysteresis in Scandinavian unemployment. European Economic Review 41 (9), 1781-1816.

Johansen, S. (1996). Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford: Advanced Texts in Econometrics, Oxford University Press.

Johansen, S. (2005). Interpretation of Cointegrating Coeficients in the Cointegrated Vector Autoregressive Model. Oxford Bulletin of Economics and Statistics 67 (1), 93-104.

Juselius, K. (2006). The cointegrated VAR model: Econometric methodology and macroeconomics applications. Oxford University Press.

Klemp, M. and N. F. Møller (2015). Post-malthusian dynamics in pre-industrial scandinavia. The Scandinavian Journal of Economics.

Layard, R. and S. Nickell (1987). The labour market. In R. Dornbusch and R. Layard (Eds.), The performance of the British economy. Clarendon.

Layard, R., S. Nickell, and R. Jackman (2005). Unemployment. Macroeconomic Performance and the labour market (2nd ed.). Oxford University Press.

Lindbeck, A. and D. J. Snower (1986, May). Wage setting, unemployment, and insider-outsider relations. American Economic Review 76 (2), 235-39.

Lütkepohl, H. (2005). New Introduction to Multiple Time Series Analysis. Springer.

Mitchell, W. and J. Muysken (2008). Full employment abandoned: shifting sands and policy failures. Edward Elgar Publishing.

Mosconi, R. and C. Giannini (1992, August). Non-causality in cointegrated systems: Represen- tation estimation and testing. Oxford Bulletin of Economics and Statistics 54 (3), 399-417.

Møller, N. F. (2013, August). Understanding unemployment hysteresis: A system-based econo- metric approach to changing equilibria and slow adjustment. Discussion Papers 13-06, Uni- versity of Copenhagen. Department of Economics.

Møller, N. F. and P. Sharp (2013). Malthus in Cointegration Space: Evidence of a Post- Malthusian pre-industrial England. Journal of Economic Growth, DOI:10.1007/s10887-013-9094-0.

O'Shaughnessy, T. (2011). Hysteresis in unemployment. Oxford Review of Economic Pol- icy 27 (2), 312-337.

Papell, D. H., C. J. Murray, and H. Ghiblawi (2000). The structure of unemployment. The Review of Economics and Statistics 82 (2), 309-315.

Røed, K. (1997, December). Hysteresis in unemployment. Journal of Economic Surveys 11 (4), 389-418.