Unemployment hysteresis in the Eurozone area: evidences from nonlinear heterogeneous panel unit root test

Abstract

Our article tests for hysteresis of unemployment rate for 17 Eurozone countries over the period 2000:1 to 2013:1 through the use of new nonlinear panel unit root tests by adopting the sequential panel selection method (SPSM), proposed by Chortareas and Kapetanios (2009) and a nonlinear panel unit root test developed by Ucar and Omay (2009). The results show that the unemployment rates for 17 Eurozone countries are not stationary and conform to the hysteresis hypothesis for both panel unit root tests of Ucar and Omay (2009) and SPSM without Fourier. We reported the results of the Panel Kapetanios, Shin and Snell (KSS) test with a Fourier function and found that the unemployment rates in 11 countries are stationary and this result is in accord with natural rate hypothesis. On the other hand, unemployment rates in six countries, namely Netherlands, Slovakia, Slovenia, Italy, Portugal and Cyprus, show hysteresis effect.

Keywords:

• unemployment
• hysteresis effect
• nonlinear panel unit root test
• Eurozone countries

JEL Classification:

• C22
• C23
• E24
• J64

Notes

¹ Hysteresis in a labour market context refers to the high degree of dependence of current unemployment upon past unemployment (Smith, 2003).

² The results of the panel KSS unit root test only reject the null of three countries, namely Luxembourg, Estonia and Malta.