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

Abstract

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 et al. (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 results show that unemployment hysteresis hypothesis is strongly rejected when taking into account the cross-sectional and structural break assumptions. Thus, unemployment rates are expected to return back to their natural levels without executing any costly macroeconomic labour market policies by the OECD's governments.

Hysteresis of unemployment rates in Africa: new findings from Fourier ADF test

“…As a consequence, more unit root testing frameworks have been considered to ascertain the true stationarity stance of unemployment rate. These include Levin and Lin (1992) and Im et al (1997) panel-based unit root tests (see Song and Wu, 1998;Leon-Ledesma, 2002 Empirically, the hysteresis hypothesis of unemployment rate has however been examined for diverse regions, which include Spanish regions (Garcia-Cintado, Romero-Avila and Usabiaga, 2015); Nordic countries (Furuoka, 2017a,b); OECD member countries (Meng, Strazicich and Lee, 2017;Khraief and Azam, 2018); G7 countries (Jiang, Cai, Peng and Chang, 2018); Turkey (Guris, Tiftikcigil and Tirasoglu, 2017); European countries with US and Japan (Akdogan, 2017); Eastern European countries (Xie, Chang, Grigorescu and Hung, 2018); specific categorization of five high debt countries -Portugal, Ireland, Italy, Greece and Spain (Li, Ranjbar and Chang, 2017); eleven African countries -Botswana, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Nigeria, Senegal, South Africa, Tanzania and Zambia (Caporale and Gil-Alana, 2018a); among others.…”

Unemployment and Sectoral Competitiveness in Southern European Union Countries. Facts and Policy Implications

“…'the majority of shocks to unemployment are temporary but, occasionally, and mainly associated with recessions, can provoke a change in the level of the natural rate of unemployment' (Camarero et al, 2006). Bolat, Tiwari, and Erdayi (2014) and Khraief, Shahbaz, Heshmati, and Azam (2015) have confirmed this theory for the OECD countries, when they have applied nonlinear unit root tests. The hysteresis hypothesis in unemployment is strongly rejected when structural changes and cross-section dependence are taken into consideration.…”

Unemployment rate dynamics in small open economy: The case of Serbia

“…Empirical studies have been conducted for a number of countries and regions. Some recent works include: Furuoka (2014Furuoka ( , 2017aFuruoka ( , 2017b, Ghoshray and Stamatogiannis (2015), Altuzarra (2015), Caporale, Gil-Alana and Lovcha (2016), Mladenović (2016), Jiang and Chang (2016), Alogoskoufis (2018) and Khraief, Shahbaz, Heshmati and Azam (2020).…”