Does Hysteresis in Unemployment Occur in OECD Countries? Evidence from Parametric and Non-Parametric Panel Unit Roots Tests

Liew, Venus Khim-Sen and Chia, Ricky Chee-Jiun and Puah, Chin-Hong (2009): Does Hysteresis in Unemployment Occur in OECD Countries? Evidence from Parametric and Non-Parametric Panel Unit Roots Tests.

Abstract

This study tests the hysteresis hypothesis of unemployment in fourteen OECD countries by examining the stationarity of unemployment rates using several panel unit root tests. Empirical results show that the hysteresis hypothesis cannot be rejected for majority of the OECD when the tests are conducted on the basis of individual countries. However, rejection is obtained when cross-country interdependence in unemployment rates is incorporated in the estimation. Therefore, it is crucial to consider the cross-country labor markets interdependence when testing the hysteresis hypothesis as the labor market institutions and the stabilization policy of the labor markets in these OECD countries can play an important role in maintaining the unemployment to sustainable levels.

• Item Type: MPRA Paper
• Language: English
• Keywords: Unemployment, Hysteresis Hypothesis, Panel Unit Root Test, Parametric Test, Non-Parametric Test, OECD
• Subjects: N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations; 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; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models

References

Arestis, P. and Mariscal, I. (1999) Unit Roots and Structural Breaks in OECD Unemployment, Economics Letters, 65, 149-156.

Arestis, P. and Mariscal, I. (2000) OECD Unemployment: Structural Breaks and Stationary, Applied Economics, 32, 399-403.

Baharumshah, A.Z., Haw, C.T. and Fountas, S. (2005) A Panel Study on Real Interest Rate Parity in East Asian Countries: Pre and Post-Liberalization Era, Global Finance Journal, 16, 69-85.

Blanchard, O.J. and Summers, L.H. (1986) Hysteresis and the European Unemployment Problem, NBER Macroeconomics Annual. Cambridge, MA: MIT Press.

Blanchard, O.J. and Wolfers, J. (1987) Hysteresis in Unemployment, European Economic Review, 31, 288-295.

Brunello, G. (1990) Hysteresis and the Japanese Unemployment Problem: A Preliminary Investigation, Oxford Economic Papers, 42, 483-500.

Choi, I. (2001) Unit Root Tests for Panel Data, Journal of International Money and Finance, 20, 249-272.

Cochrane, J.H. (1991) A Critique of the Application of Unit Root Tests, Journal of Economic Dynamics and Control, 15, 275-284.

Cross, R. (1995) The Natural Rate of Unemployment: Reflections on 25 Years of the Hypothesis. New York and Melbourne: Cambridge University Press.

DeJong, D.N., Nankervis, J.C., Savin, N.E. and Whiteman, C.H. (1992) The Power Problems of Unit Root Tests in Time Series with Autoregressive Errors, Journal of Econometric, 53, 323-343.

Elliott, G., Rothenberg, T.J. and Stock, J.H. (1996) Efficient Tests for an Autoregressive Unit Root, Econometrica, 64, 813-836.

Fisher, R.A. (1932) Statistical Methods for Research Workers. Edinburgh: Oliver and Boyd.

Graafland, J.J. (1989) Can Hysteresis Explain Different Labour Market Operations between Europe and the United States? Applied Economics, 21, 95-111.

Gustavsson, M. and Osterholm, P. (2006) Hysteresis and Non-Linearities in Unemployment Rates, Applied Economics Letters, 13, 545-548.

Holmes, M.J. (2002) Does Long-Run Real Interest Parity Hold among EU Countries? Some New Panel Data Evidence, The Quarterly Review of Economics and Finance, 42, 733-746.

Im, K.S., Pesaran, M.H. and Shin, Y. (2003) Testing for Unit Roots in Heterogeneous Panels, Journal of Econometrics, 115, 53-74.

Im, K.S., Pesaran, M.H. and Shin, Y. (1997) Testing for Unit Roots in Heterogeneous Panel, Working Paper, Department of Applied Economics, University of Cambridge.

Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992) Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root, Journal of Econometrics, 54, 159-178.

Leon-Ledesma, M.A. (2002) Unemployment Hysteresis in the US and EU: A Panel Data Approach, Bulletin of Economics Research, 54, 94-102.

Levin, A. and Lin, C.F. (1992) Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties, UC San Diego, Working Paper, 92-123.

Levin, A., Lin, C.F. and Chu. C. (2002) Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties, Journal of Econometrics, 108, 1-24.

Maddala, G.S. and Wu, S. (1999) A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test, Oxford Bulletin of Economics and Statistics, 61, 631-652.

Mitchell, W.F. (1993) Testing for Unit Roots and Persistence in OECD Unemployment Rates, Applied Economics, 25, 1489-1501.

Neudorfer, P., Pichelmann, K. and Wagner, M. (1990) Hysteresis, NAIRU and Long Term Unemployment in Austria, Empirical Economics, 15, 217-229.

Ng, S. and Perron, P. (2001) Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power, Econometrica, 69, 1519-1554.

Perron, P. (1989) The Great Crash, the Oil Price Shock and the Unit Root Hypothesis, Econometrica, 57, 1361-1401.

Rapach, D.E. and Wohar, M.E. (2002) Testing the Monetary Model of Exchange Rate Determination: New Evidence from a Century of Data, Journal of International Economics, 58, 359-385.

Røed, K. (2002) Unemployment Hysteresis and the Natural Rate of Vacancies, Empirical Economics, 27, 687-704.

Song, F.M. and Wu, Y. (1997) Hysteresis in Unemployment: Evidence from 48 States, Economic Inquiry, 35, 235-244.

Song, F.M. and Wu, Y. (1998) Hysteresis Unemployment: Evidence from OECD Countries, The Quarterly Review of Economics and Finance, 38, 181-192.