Nonlinear vs. nonstationary of hysteresis in unemployment: evidence from OECD economies

Abstract

This study examines the lower and higher boundaries for the threshold value to be considered an indicator of unemployment in a specific country. Specially, the objective is to conduct the critical moment of hysteresis effects happening in unemployment rate using a group of 16 organization for economic cooperation and development of countries. The methodological strategy applies a developed tool of threshold tests involving unit root against stationary but nonlinear alternative by Caner and Hansen (2001). A significant contribution of this study is identifying a trigger point from the nonstationary of time series process for the first time in the literature. Our empirical results finds strong evidence of the existence of nonlinear stationary in Australia, Canada, Finland, France, Germany, Ireland, Japan, Netherlands and the USA when the threshold effect holds. The hysteresis hypothesis is further confirmed by the fact that the unemployment rate exceeds the boundaries of the band, for Australia, Finland, France, Germany, Japan and the USA when the threshold unit root test of Caner and Hansen is rigorously implemented.

Testing Hysteresis in Unemployment in G7 Countries Using Quantile Unit Root Test with both Sharp Shifts and Smooth Breaks

“…The empirical results of ADF and KPSS test suggest mixed results for the series in levels. These findings are partly consistent to the results of Roed (1996), Chang et al (2007), Lin et al (2008), Gustavsson and Osterholm (2010), Lee et al (2010), Chang and Lee (2011a, b), Chang (2011), Lee et al (2013), andFuruoka (2014), indicating that hysteresis in unemployment holds.…”

“…However, once again, hysteresis was rejected in the case of the United States (Roed 1996). Lin et al (2008) employ threshold unit root test of Caner and Hansen (2001) to re-investigate hysteresis in unemployment for OECE countries and their empirical findings support hysteresis in unemployment for only Australia, Finland, France, Germany, Japan and the USA. Lee et al (2010) study hysteresis in unemployment for 9 high-performing Asian countries and their empirical results support hysteresis in unemployment for only 5 out of 9 countries (i.e., Hong Kong, Indonesia, South Korea, Singapore, and Taiwan), when unit root tests are taken structural breaks into account.…”

Testing the hysteresis effect in the US state-level unemployment series

“…and Summers (1986), Camarero and Tamarit (2004), Caner and Hansen (2001), Chang and Lee (2011), Jaeger. and Parkinson (1994), Gil-Alana (2001, Lee and Chang (2008), Leon-Ledesma (2002), Lee (2010), Lin., Kuon, and Yuan (2008), Mohan. et al (2008, Roed (1996), Song and Wu (1998) and Yilanci (2008), who found supportive evidence of the natural rate hypothesis for the US labour market.…”

Are Shocks to Unemployment Rate in OECD Countries Permanent or Temporary? Evidence From Unit Root Tests With Non-normal Errors

“…The results supported the unemployment hysteresis in six OECD countries with one structural break. Lin et al (2008) tested unemployment hysteresis at different time periods for 16 OECD countries using nonlinear unit root tests. The results showed that hysteresis is not valid in Australia, Canada, Finland, France, Germany, Ireland, Japan, the Netherlands, and the United States.…”