Unemployment hysteresis in Australia: evidence using nonlinear and stationarity tests with breaks

This study is an attempt to test the hysteresis versus the natural rate hypothesis in unemployment rate using time series data of the Australia covering the period 1978: 2–2010:12. For the analysis, we employed nonlinear as well as different linear tests (with incorporation of endogenously determined structural breaks) of unit root. We found that the Australian unemployment rate is nonlinear process, has a partial unit root and trend reverting. Therefore, we provide support for the structuralist hypothesis. This finding provides the importance of accounting for exogenous shocks in the series and gives support to the shifting natural-rate hypothesis of the Australian unemployment rate.     

Are unemployment rates in OECD countries stationary? Evidence from univariate and panel unit root tests

This paper revisits the dynamics of unemployment rate for 29 OECD countries over the period of 1980–2013. Numerous empirical studies of the dynamics of unemployment rate are carried out within a linear framework. However, unemployment rate can show nonlinear behaviour as a result of business cycles or some idiosyncratic factors specific to labour market (Cancelo, 2007). Thus, as a testing strategy, we first perform Harvey, Leybourne, and Xiao (2008) linearity unit root test and then apply the newly ESTAR nonlinear unit root test suggested by Kruse (2011). This test has higher power than conventional unit root tests when time series exhibits nonlinear behaviour. Our empirical findings provide significant evidence in favour of unemployment rate stationarity for 25 countries. For robustness purpose, we have also used panel unit root tests without and with structural breaks. The empirical results show that unemployment hysteresis hypothesis is strongly rejected, when taking into account the cross-sectional and structural break assumptions. Thus, unemployment rate is expected to return back to their natural levels without executing any costly macroeconomic labour market policies by the OECD’s governments.     

Okun's Law Revisited*

In the light of modern theoretical studies, the negative relationship between output and unemployment may take a nonlinear form, in the sense that changes in output can cause asymmetric changes in the unemployment rate. A regime‐dependent specification of Okun's law, where the inverse relationship between cyclical unemployment and cyclical GDP is allowed to differ across recessions and expansions, is estimated for the US economy. Using both the Hodrick–Prescott filter and a bivariate structural time series model to isolate the cyclical component of the variables of interest, the nonlinear specification is highly significant when tested against the linear alternative independently of the method used for extracting the cycle of unemployment and GDP. The estimation results imply that the contemporaneous effect of growth on unemployment is asymmetric and significantly higher in recessions than in expansions, and shocks to unemployment tend to be more persistent in the expansionary regime.     

A nonlinear long memory model, with an application to US unemployment

Two important empirical features of US unemployment are that shocks to the series seem rather persistent and that it seems to rise faster during recessions than that it falls during expansions. To jointly capture these features of long memory and nonlinearity, we put forward a new time series model and evaluate its empirical performance. We find that the model describes the data rather well and that it outperforms related competitive models on various measures of fit.     

Hysteresis versus NAIRU and convergence versus divergence: The behavior of regional unemployment rates in Brazil

The aim of this work is to analyze the regional unemployment rate behavior in Brazil. Firstly, unit root tests with structural breaks were used to determine which theoretical framework – hysteresis or NAIRU – is more appropriate to explain the unemployment dynamics not only in six Brazilian metropolitan areas – São Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Salvador and Recife – but also at national level. Hysteresis is found to be the best choice in five, but Rio de Janeiro. This indicates a high persistence in the Brazilian regional unemployment rate. Secondly, we investigated whether these five metropolitan regions, characterized by the hysteresis effect, show a stochastic convergence. The latter was found in every case, but Porto Alegre.     

Financial Depth and the Asymmetric Impact of Monetary Policy

This paper investigates the importance of financial depth in evaluating the asymmetric impact of monetary policy on real output over the course of the US business cycle. We show that monetary policy has a significant impact on output growth during recessions. We also show that financial deepening plays an important role by dampening the effects of monetary policy shocks in recessions. The results are robust to the use of alternative financial depth and monetary policy shock measures as well as to two different sample periods.     

Monetary policy regimes and the term structure of interest rates

US monetary policy is investigated using a regime-switching no-arbitrage term structure model that relies on inflation, output, and the short interest rate as factors. The model is complemented with a set of assumptions that allow the dynamics of the private sector to be separated from monetary policy. The monetary policy regimes cannot be estimated if the yield curve is ignored during estimation. Counterfactual analysis evaluates importance of regimes in policy and shocks for the great moderation. The low-volatility regime of exogenous shocks plays an important role. Monetary policy contributes by trading off asymmetric responses of output and inflation under different regimes.     

Nonlinearities and Fractional Integration in the US Unemployment Rate*

This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange multiplier procedure with a standard null‐limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some nonlinear functions of labour‐demand variables such as real oil prices and real interest rates. We also find evidence of a long‐memory component. Our results are consistent with a hysteresis model with path dependency rather than a non‐accelerating inflation rate of unemployment (NAIRU) model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilization policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy‐making.     

Testing for Hysteresis in Unemployment in OECD Countries: New Evidence using Stationarity Panel Tests with Breaks*

This paper tests hysteresis effects in unemployment using panel data for 19 Organization for Economic Co‐operation and Development (OECD) countries covering the period 1956–2001. The tests exploit the cross‐sectional variations of the series, and additionally, allow for a different number of endogenous breakpoints in the unemployment series. The critical values are simulated based on our specific panel sizes and time periods. The findings stress the importance of accounting for exogenous shocks in the series and support the natural‐rate hypothesis of unemployment for the majority of the countries analysed.     

The non‐linear dynamics of output and unemployment in the U.S.

This paper studies the joint dynamics of U.S. output and unemployment rate in a non‐linear VAR model. The non‐linearity is introduced through a feedback variable that endogenously augments the output lags of the VAR in recessionary phases. Sufficient conditions for the ergodicity of the model, potentially applying to a larger class of threshold models, are provided. The linear specification is rejected in favour of our threshold VAR. However, in the estimation the feedback is found to be statistically significant only on unemployment, while it transmits to output through its cross‐correlation. This feedback effect from recessions generates important asymmetries in the propagation of shocks, a possible key to interpret the divergence in the measures of persistence in the literature. The regime‐dependent persistence also explains the finding that the feedback from recession exerts a positive effect on the long‐run growth rate of the economy, an empirical validation of the Schumpeterian macroeconomic theories. Copyright © 2001 John Wiley & Sons, Ltd.     

Keynesian impulses versus Solow residuals: identifying sources of business cycle fluctuations

We employ a neoclassical business‐cycle model to study two sources of business‐cycle fluctuations: marginal efficiency of investment shocks, and total factor productivity shocks. The parameters of the model are estimated using a Bayesian procedure that accommodates prior uncertainty about their magnitudes; from these estimates, posterior distributions of the two shocks are obtained. The postwar US experience suggests that both shocks are important in understanding fluctuations, but that total factor productivity shocks are primarily responsible for beginning and ending recessions. Copyright © 2000 John Wiley & Sons, Ltd.     

Censored latent effects autoregression,with an application to US unemployment

A model is proposed to describe observed asymmetries in postwar unemployment time series data. We assume that recession periods, when unemployment increases rapidly, correspond with unobserved positive shocks. The generating mechanism of these latent shocks is a censored regression model, where linear combinations of lagged explanatory variables lead to positive shocks, while otherwise shocks are equal to zero. We apply this censored latent effects autoregression to monthly US unemployment, where the positive shocks are found to be predictable using various leading indicators. The model fits the data well and its out‐of‐sample forecasts appear to improve on those from alternative models. Copyright © 2002 John Wiley & Sons, Ltd.     

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.     

Macroeconomic Effects of Precautionary Demand for Oil

We evaluate the macroeconomic effects of shocks specific to the oil market, which mainly reflect fluctuations in precautionary demand for oil driven by uncertainty about future supplies. A two‐stage identification procedure is used. First, daily changes in the futures–spot price spread proxy for precautionary demand shocks and the path of oil prices is estimated. This information is then exploited to restrict the oil price response in a vector autoregression. Impulse responses suggest that such shocks reduce output and raise prices. Historical decomposition shows that they contributed significantly to the US recessions in the 1990s and in the early 2000s, but not to the most recent slump. Copyright © 2014 John Wiley & Sons, Ltd.     

The unemployment structure of the US states

This paper analyses the time series properties of the unemployment rates of the US economy using a regional disaggregated level. Our results are, in general, favorable to the rejection of the presence of a unit root in these variables. However, we can also observe that this conclusion is clearly qualified by the level of disaggregation employed. We also find robust evidence in favor of the presence of some breaks in the evolution of these unemployment rates. We subsequently offer an estimation of the NAIRU, which is based on the use of the Bai–Perron procedure.     

Unemployment shocks and material deprivation in the European Union: A synthetic control approach

This paper analyzes how material deprivation responds to drastic changes in unemployment levels. We explore unemployment shocks registered in some European Union countries during the so-called Great Recession. To do so, we apply the synthetic control methodology, which has been rarely used in the field of distributive analyses. We use this approach to identify the impact of unemployment shocks on material deprivation and conduct different sensitivity analyses to test the results. We find that contrary to the traditional assumption of the low sensitivity of material deprivation measures to changes in the economic cycle, unemployment shocks have a significant and rapid impact on material deprivation. This conclusion holds even when extending the period of analysis, changing the indicator of material deprivation, or modifying the definition of unemployment shock.     

Unemployment in East and West Europe

We use new 1991–2005 panel data to address the issue of unemployment in Central-East Europe. We compare the evolution of unemployment, its dynamics and related phenomena in five former communist economies in the Central Europe and use the geographically close West Germany as a benchmark for a mature market economy. We identify the differences and similarities in the evolution of the key labor market variables and contrast different outcomes with the diverse initial conditions and subsequent paths. All countries have experienced aggregate demand shocks, structural shocks and hysteresis. Despite diverse initial conditions and subsequent paths, the patterns observed are surprisingly similar. The eastern part of Germany appears to be a special case with extraordinary high unemployment inflows. Contrary to the theoretical models, in the transition economies we do not observe an initially rapid rise in the inflow rate, followed by a convergence of this rate to the levels of market economies. Rather, there is a relatively gradual rise in the inflow rate towards the level of market economies. The differences in unemployment rates turn out to be attributable to a considerable extent to the actual differences in the inflow rates. The trajectories in the unemployment-vacancy space observed in the Central-East European countries increasingly resemble those observed in the developed market economies. Interestingly, these similarities arise despite differences in the institutional setting across these economies.     

Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies

We extend the standard textbook search and matching model by introducing deep habits in consumption. This assumption generates amplification in the response of labour market variables to technology shocks by producing endogenous countercyclical mark-ups. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks and the numerical simulations generate an artificial Beveridge curve that is in line with the data. Our model preserves the assumption of fully flexible wages for new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. Finally, we show that in contrast to models with exogenous mark-up shocks, the deep habits model does not require an implausible variation in the elasticity of demand to match the volatility of labour market variables, and the cyclical properties of the mark-up are in line with empirical evidence.     

Trend‐stationary GNP: evidence from a new exact pointwise most powerful invariant unit root test

There has been a substantial debate whether GNP has a unit root. However, statistical tests have had little success in distinguishing between unit‐root and trend‐reverting specifications because of poor statistical properties. This paper develops a new exact small‐sample, pointwise most powerful unit root test that is invariant to the unknown mean and scale of the time series tested, that generates exact small‐sample critical values, powers and p‐values, that has power which approximates the maximum possible power, and that is highly robust to conditional heteroscedasticity. This test decisively rejects the unit root null hypothesis when applied to annual US real GNP and US real per capita GNP series. This paper also develops a modified version of the test to address whether a time series contains a permanent, unit root process in addition to a temporary, stationary process. It shows that if these GNP series contain a unit root process in addition to the stationary process, then it is most likely very small. Copyright © 2001 John Wiley & Sons, Ltd.     

Unemployment in Greece: Evidence from Greek regions using panel unit root tests

The purpose of the paper is to examine the nature of Greek regional unemployment. The paper contributes to the literature assessing the stochastic properties of Greek unemployment rate in the context of the Greek regions by relying on various univariate and panel unit root tests. In particular, recently developed and more powerful panel unit-root tests that control for structural breaks, heterogeneity and cross-sectional dependence in the panel are employed. The results show that in all cases, after taking into account the fact that regional unemployment rates in Greece are subject to a structural break, the null hypothesis of a unit root is not rejected, indicating that the Greek regional unemployment series are non-stationary with the presence of a structural break.