Testing for hysteresis: Unemployment persistence and wage adjustment

Fève, Patrick; Hénin, Pierre-Yves; Jolivaldt, Pierre

doi:10.1007/s001810200144

Cited by 16 publications

(4 citation statements)

References 15 publications

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“…4 Røed (2002) confirmed the presence of unemployment hysteresis in 10 OECD countries. 5 Fève et al (1999) also validated the presence of wage hysteresis for OECD countries. 6 Australia, Belgium, Canada, Denmark, Finland, Germany, Luxemburg, Switzerland and the UK.…”

Section: Literature Reviewmentioning

confidence: 82%

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

Khraief

Shahbaz

Heshmati

et al. 2020

The North American Journal of Economics and Finance

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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.

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Section: Literature Reviewmentioning

confidence: 82%

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

Khraief

Shahbaz

Heshmati

et al. 2020

The North American Journal of Economics and Finance

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“…At the empirical level, the structural VAR analysis conducted by Balmaseda et al (2000) supports, for almost all the OECD countries, an identification scheme based on unemployment being persistent but stationary. More recently, Fève et al (2003) estimate, again for the OECD countries, a model including equation (1) and find strong evidence of a persistence parameter that assumes values close (but not equal) to unity.…”

Section: Structure Of the Economymentioning

confidence: 99%

Currency Attacks With Multiple Equilibria and Imperfect Information: The Role of Wage-Setters

Femminis

2007

Macroecon. Dynam.

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We consider a dynamic stochastic model of currency attacks, characterized by imperfect information about a fundamental. Agents not only decide whether to attack the peg but also formulate expectations concerning the probability of future devaluation. The subjective devaluation probabilities influence the inflation expectations, which, in turn, affect the next-period wage level and unemployment. Hence, expectations affect the following-period fundamental and the policymaker's ability to resist an attack. Agents decide upon next-period wage having observed whether the current-period currency attack has been successful or not: this publicly available information is sufficient to allow for a coordination effect among agents, leading to multiple equilibria. Our results imply that a 'transparent policy' during a currency crisis is in the policymaker's interest.

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“…This leads to lower longer-term real wage flexibility or a complete lack of response of wages in the case of hysteresis (see Gordon 1989, Moghadam andvan Rijckeghem 1994). 9 Although persistence effects are usually diagnosed by a unit root in the unemployment rate (Leon- Ledesma and McAdam, 2004), alternatively a positive coefficient on lagged unemployment in the Phillips curve may also reflect a persistence effect (Layard et al 2006, Feve et al, 2003. Unemployment persistence or hysteresis has been documented for many EU countries (e.g.…”

Section: Baseline Specificationmentioning

confidence: 99%