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Examination of Unemployment in the Framework of Hysteresis and Natural Rate in OECD Countries: Evidence from Alternative Panel Unit Root Tests

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  • Melike Dedeoglu

    (Erciyes Universitesi, Iktisadi ve Idari Bilimler Fakultesi, Iktisat Bolumu, Kayseri, Turkiye)

Abstract

Unemployment continues to be one of the important macroeconomic problems, its negative effects are not only seen at the economic level, but also in all societies at the social level. According to December 2020 data, the unemployment rate among the member countries of the Organization for Economic Cooperation and Development (OECD) increased by 1.7 points to 6.9% compared to February, when the Covid-19 pandemic had not yet shaken the labor market. Whether the effects of shocks, such as the pandemic process, on unemployment rates are temporary or permanent, it is necessary to accurately determine to fight unemployment effectively. There are three basic approaches to the course of the unemployment rate. While the unemployment series is stationary according to the natural rate hypothesis, it contains a unit root according to the hysteresis hypothesis, and according to the structuralist approach, it follows a stationary course even though there are breaks. In this study, monthly unemployment data of 30 OECD countries between 2001 and 2020 were used. The contribution of this study to the literature is realized by adding the monthly data of 2020 to the analysis of the effect of the pandemic in OECD countries. After controlling for the cross-sectional dependence in the seasonally adjusted series, the validity of the hysteresis or the natural rate hypothesis was investigated with second-generation panel unit root tests that consider the cross-sectional dependence. Pesaran (2007), Smith (2005), Hadri and Kurozumi (2012) panel unit root tests and then Nazlıoglu and Karul (2017) Fourier panel unit root tests were applied, respectively. The results of all tests performed confirm the hysteresis hypothesis for the OECD panel. The results show that shocks affecting the unemployment rate across the OECD will have lasting effects.

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  • Melike Dedeoglu, 2021. "Examination of Unemployment in the Framework of Hysteresis and Natural Rate in OECD Countries: Evidence from Alternative Panel Unit Root Tests," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 0(35), pages 129-145, December.
    • Handle: RePEc:ist:ekoist:v:0:y:2021:i:35:p:129-145
    DOI: 10.26650/ekoist.2021.35.0000
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