Hysteresis vs. natural rate of US unemployment

Abstract

This paper investigates the stochastic nature of the unemployment rate allowing for cross-section dependence from a panel of US state-level data. We first employ the PANIC method to identify the common and idiosyncratic components. Powerful recursive mean adjustment (RMA) methods are used to test for unit roots. We find significant evidence of a nonstationary common component when the data from the most recent recession are included.Even when stationarity is empirically supported, the bias-corrected half-life of the common component appears very long, casting doubt on the usefulness of the natural rate hypothesis.

A smooth transition long-memory model

“…This finding of a local nonstationarity of the unemployment rate is in line with the results of Leon-Ledesma (2002), Cheng et al (2012), but in their paper the nonstationarity is caused by the presence of a unit root in the unemployment rate series. In figure 5, the higher persistence in one regime relative to the other is illustrated by higher gap between the unemployment rate and its long-run component, up until the mid 1980s.…”

Investment hysteresis and potential output: A post-Keynesian–Kaleckian agent-based approach

“…Storm and Naastepad (2012) give evidence that, because of this influence, temporary shocks will influence the long-run equilibrium-which amounts to the demise of the NAIRU order. Another way to introduce path-dependency into consideration is to use linear models of hysteresis (Cassetti, 2006;Chang and Su, 2014;Cheng et al, 2012;Schoder, 2012), or to introduce exogenous structural changes during the traverse (see Lavoie, 1996). However, because of their linear nature, these path-dependent models cannot exhibit genuine hysteresis but merely persistence, since the steady state is still insensitive to cumulatively neutral shocks: two subsequent shocks of same magnitude but different sign do not leave any trace on the equilibrium (see Amable et al, 1994).…”

Modelling the behaviour of unemployment rates in the US over time and across space

“…This seminal paper has produced a vast literature that has focused on the stationarity properties of the series. Numerous studies also address the natural rate versus hysteresis hypothesis for the US include Song and Wu [46], Payne et al [38], León-Ledesma [27], Clemente et al [8] and Cheng et al [7] among others. These studies can only offer mixed evidence on the nature of fluctuations in US state unemployment rates.…”

“…However, they observe that this conclusion is clearly qualified by the level of disaggregation employed. Most recently, Cheng et al [7] investigate the stochastic nature of the unemployment rate allowing for cross-section dependence from a panel of US state-level data. They find significant evidence of a non-stationary common component when the data from the most recent recession are included.…”

“…Another factor used to explain hl ij is the average vacancy rate between states i and j denoted as avac ij . 7 More vacancies are expected to facilitate a faster speed of ad-justment when it comes to considering unemployment responses within states, which implicitly assumes that state vacancies are the "right" vacancies insofar as these are jobs that the unemployed can fill readily. While a higher rate of unemployment normally occurs with a lower rate of vacancies, inefficient labour markets can be due to mismatches between available jobs and the unemployed and an immobile labour force.…”