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Is There Hysteresis in Unemployment in OECD Countries? Evidence From Panel Unit Root Test With Structural Breaks



Author(s)

Meliha Ener, Feyza Arica

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DOI:10.17265/1537-1506/2011.04.006

Canakkale Onsekiz Mart University, Biga, Turkey

This study tests the hysteresis hypothesis of unemployment in fifteen OECD countries by using panel unit root tests which allow for structural breaks. We apply annual unemployment rates covering 1985-2008 periods. We test whether unemployment rates are stationary by using second generation tests which allow cross section dependency among series and panel unit root test based on structural break advanced by Carrion-i-Silvestre, Barrio-Castro and Lopez-Bazo (2005). We find series as a stationary process with structural breaks according to Carrion-i Silvestre et al. (2005) test, while we find series as unit root process with second generation panel unit root test. According to the Carrion-i Silvestre et al. (2005) test, we find the evidence of absence of hysteresis in analyzed countries. As a result, temporary shocks have temporary effects on unemployment instead of permanent effect. Structural factors can affect the natural rate of unemployment and, therefore, unemployment would be stationary around a process that is subject to structural breaks. So, there still exists a unique natural rate of unemployment to which the economy eventually will converge.

structural break, unemployment, cross-section dependence, panel unit root tests