Determining Unemployment Hysteresis in European Countries Using Linear and Nonlinear Unit Root Tests: The 1991-2020 Period

Abstract

Unemployment is accepted as an important macroeconomic problems in all countries. Due to the unemployment rate being an important variable, it is a priority target in economic policies. In this direction, the issue of how to increase the employment rate and reduce the unemployment rate is included in countries’ short-, medium-, and long-term economic policies of countries. Completely eliminating unemployment is possible. For this reason, hypotheses have been put forward in the literature regarding unemployment. With two basic unemployment theories being found: the unemployment hysteresis hypothesis and the natural rate of unemployment hypothesis. According to the unemployment hysteresis hypothesis, when the actual unemployment rates exceeds the natural unemployment rate due to a shock, unemployment does not return to its previous level once the effects from the shock end. The unemployment time series’ unit root proves the existence of unemployment hysteresis, and the series being stationary process at the level pf unemployment proves the assumption of the natural rate of unemployment. This study determines the precense of unemployment hysteresis in European Union countries using linear and nonlinear unit root tests over annual data for the 1991-2020 period. All tests determined unemployment hysteresis to be present in Luxembourg.

Keywords

• unemployment
• unemployment hysteresis
• linear and nonlinear unit root test