Unemployment hysteresis in OECD countries: Centurial time series evidence with structural breaks

This paper re-examines the hypothesis of unemployment hysteresis in which the endogenously determined break points are incorporated in 14 major OECD countries by using annual data over one century in length, so as to avoid the seasonal adjustment shortcoming and be free from any local features of a short sample period. We utilize a new powerful Lagrange Multiplier unit root test that endogenously determines structural breaks in level and/or trend, as proposed by Lee and Strazicich [Lee, J., Strazicich, M.C., 2003. Minimum Lagrange Multiplier unit root test with two structural breaks, The Review of Economics and Statistics 85, 1082-1089, Lee, J., Strazicich, M.C., 2004. Minimum LM unit root test with one structural break, Department of Economics, Appalachian State University Working Paper Series]. Our empirical findings provide significant evidence that unemployment rates are stationarity and these results do not change in the robustness test process-that is, the unemployment hysteresis hypothesis is strongly rejected. We also construct the half-lives to investigate the persistence of deviations of unemployment rate. Overall, we discover several critical economic affairs which cause unemployment rates to fluctuate significantly in 14 OECD countries. Some policy implications are proposed through our observations.