Can the hysteresis hypothesis in Spanish regional unemployment be beaten? New evidence from unit root tests with breaks

- This paper investigates the stochastic properties of Spanish regional unemployment rates.
- This paper uses a large battery of univariate unit root tests with breaks.
- The evidence supports the hysteresis hypothesis for each of the 17 Spanish regions.
- The results call for policy measures to reduce labour market rigidities.

This paper tests the hysteresis hypothesis in Spanish regional unemployment using quarterly data over the 1976-2014 period using a large battery of univariate unit root tests allowing for two breaks in the trend function of the series. The evidence strongly supports the hysteresis hypothesis for each of the 17 Spanish regions, since we consistently fail to reject the unit root null hypothesis. When the analysis is extended to allow for five structural breaks, the conclusion remains unaltered. The results call for policy measures to reduce the sluggishness in the adjustment of the labour market to adverse shocks.