Unemployment Hysteresis in Middle-Income Countries

Abstract

Business cycles pave the way for asymmetry in the unemployment rate behavior with rapid increases during recessions and slight decreases in expansions. It, in turn, may raise the non-accelerating inflation rate of unemployment and the cost in terms of inflation of any demand stimulus policy. The recent jump in unemployment worldwide due to the COVID-19 pandemic and the government’s stimulus package following it raises questions about the cost of such a decision. We use the smooth transition model (STR) to analyze unemployment dynamics on quarterly data over the last two decades for fifteen middle-income countries. Our results suggest the absence of hysteresis except for Bulgaria, Mexico, and Ukraine. Our policy recommendation for these countries is the necessity of labor market reforms, as hysteresis will considerably reduce any economic stimulus on unemployment.Keywords: Unemployment, hysteresis, STRJEL Classification: C10, J60

Is there any ‘new normal’? Economics of the turmoil

“…a firm or country can have resilient properties, and the later refers to a state or condition which will be defined below, i.e. depicting the persistence of a phenomenon (Boukraine, 2021). In addition, resilience is considered a positive property (Palekiene et al, 2015), while hysteresis is viewed, at least in economic terms, as a negative condition (Martin, 2012).…”

“…One can discuss either the short-term or long-term effects of these shocks; yet, when one wants to discuss the persistent effects of an economic shock, there is one particular strand of literature that focuses on these enduring consequences and it utilises the concepts of hysteresis and scarring. Boukraine (2021) explains that hysteresis refers to the persistence of a phenomenon even though the factors that have led to it have already disappeared. The concept of hysteresis in economics is used to describe conditions that can occur in every market (Göcke, 2002).…”

The COVID-19 pandemic in the disaster and economic discourses

“…a firm or country can have resilient properties, and the later refers to a state or condition which will be defined below, i.e. depicting the persistence of a phenomenon (Boukraine, 2021). In addition, resilience is considered a positive property (Palekiene et al, 2015), while hysteresis is viewed, at least in economic terms, as a negative condition (Martin, 2012).…”

“…One can discuss either the short-term or long-term effects of these shocks; yet, when one wants to discuss the persistent effects of an economic shock, there is one particular strand of literature that focuses on these enduring consequences and it utilises the concepts of hysteresis and scarring. Boukraine (2021) explains that hysteresis refers to the persistence of a phenomenon even though the factors that have led to it have already disappeared. The concept of hysteresis in economics is used to describe conditions that can occur in every market (Göcke, 2002).…”