Unemployment persistence: Does the size of the shock matter?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 28 June 1996

Working Paper No. 50
By Marco Bianchi and Gylfi Zoega

One of the stylized facts of unemployment is that shifts in its mean rate between decades and half-decades account for most of its variance. In this paper, we use a statistical analysis based on switching regression models and nonparametric density estimation techniques to identify the dates of infrequent changes in the mean of the unemployment rate series of 17 countries. We find that in most countries, unemployment persistence is small once the (infrequently) changing mean rate has been removed. The changes in the mean rate coincide with large annual changes in actual unemployment. We conclude that the observed persistence
in unemployment appears to be consistent with hysteresis models which explain why unemployment hysteresis arises following large shocks to unemployment, but not following small changes. The result poses a challenge to theory since most existing hysteresis models do not have this non-linearity property.

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