A new test for analysing hysteresis in European unemployment

ABSTRACT

This article proposes a new unit root test to analyse unemployment hysteresis. The test is able to incorporate cross-sectional dependence, unattended nonlinearity and unknown structural breaks in the time-series data. This study used data on unemployment in five European countries. The findings indicated that conventional unit root tests failed to reject the null hypothesis of hysteresis for all countries. However, the newly proposed unit root test was able to reject the null hypothesis for the Spanish unemployment rate.

KEYWORDS:

• Unemployment hysteresis
• Europe
• unit root
• cross-sectional dependence
• Fourier function approximation

JEL CLAFICATIONS:

• E24
• C22
• J60

Acknowledgements

The author is grateful to Professor Jurgen A. Doornik of Oxford University for providing OxEdit free of charge for academic purposes. An earlier draft of this paper was deposited as the MPRA Paper No. 60946 at http://mpra.ub.uni-muenchen.de/60946/. The data and OxGauss codes used in the study are available at https://sites.google.com/site/fumitakafuruokaswebpage/data-and-oxgauss-codes/paper-2.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Youth unemployment is the unemployment among people who are 15–24 years old (Eurostat 2016).