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Unemployment Hysteresis and Capacity

Author

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  • Terry O'Shaughnessy

Abstract

This paper examines an open economy model in which equilibrium unemployment depends on capacity in the traded-goods sector. The model is estimated using U.K. quarterly data and compared with alternative concepts of equilibrium unemployment based on labour market variables (as in Layard and Nickell, 1986) or on the price of oil and the real interest rate (as in Carruth, Hooker and Oswald, 1998). The capacity model displays a non-linear hysteresis mechanism through which capacity utilisation and the degree of volatility of the real exchange rate interact to generate changes in equilibrium unemployment. This is modelled as logistic smooth transition autoregressive (LSTAR) process.

Suggested Citation

  • Terry O'Shaughnessy, 2001. "Unemployment Hysteresis and Capacity," Economics Series Working Papers 82, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:82
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    More about this item

    Keywords

    unemployment; hysteresis; capacity; smooth transition; real exchange rate;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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