EXAMINING UNEMPLOYMENT HYSTERESIS IN OECD COUNTRIES: EVIDENCE FROM NON-LINEAR FOURIER UNIT ROOT TESTS

Abstract

The aim of the paper is to empirically test the validity of the Unemployment Hysteresis Hypothesis in 36 OECD countries. Empirical analysis is carried out with unit root tests with different assumptions and features over the unemployment rate variable on a monthly basis, covering the widest period for each country. According to the findings, the Unemployment Hysteresis Hypothesis is valid in 75% of the countries in the ADF test, which assumes the normal distribution of the data, in 67% of the countries in the RALS-ADF test, which assumes that the data do not show normal distribution, in 56% of the countries in KSS test, which assumes that the data has a non-linear process, in 83% of the countries in the ZA test, which takes into account sharp breaks and assumes that the data are normally distributed, in 47% of the countries in the Fourier-ADF test, which takes into account fourier breaks and assumes that the data are normally distributed and finally in 53% of the countries in the Fourier-KSS, which considers Fourier breaks and assumes that the data have a nonlinear process. The results reveal that the number of countries in which the Unemployment Hysteresis Hypothesis is valid decreases in tests that take into account the Fourier breaks. In summary, all unit root tests except the Fourier-ADF test indicate the existence of hysteresis effects in OECD countries.