Persistence and non-linearity in US unemployment: A regime-switching approach

This article examines persistence and nonlinearity in the US unemployment rate in the post-war period by using a regime-switching unit root test. The empirical results indicate that a regime-switching unit root test outperforms conventional unit root tests and describes unemployment behavior better over the business cycle in the sample. While shocks to US unemployment dissipate in expansions, shocks to the unemployment rate seem to be persistent in recessions, supporting the hysteresis hypothesis. This is consistent with the usual explanation of hysteresis that workers may lose valuable job skills in protracted recessions.

► We analyze the behavior of unemployment using linear and regime switching unit root tests. ► The empirical results suggest that unemployment has regime dependent properties. ► We also find regime-dependent non-stationarity in the unemployment rate. ► Keynesian demand-driven policies are relevant in combating unemployment in the long-run. ► A combination of demand driven and structural policies must be implemented to reduce unemployment in protracted recessions.