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Are unemployment rates in OECD countries stationary? Evidence from univariate and panel unit root tests

Naceur Khraief (), Muhammad Shahbaz (), Almas Heshmati () and Muhammad Azam

The North American Journal of Economics and Finance, 2020, vol. 51, issue C

Abstract: This paper revisits the dynamics of unemployment rate for 29 OECD countries over the period of 1980–2013. Numerous empirical studies of the dynamics of unemployment rate are carried out within a linear framework. However, unemployment rate can show nonlinear behaviour as a result of business cycles or some idiosyncratic factors specific to labour market (Cancelo, 2007). Thus, as a testing strategy, we first perform Harvey, Leybourne, and Xiao (2008) linearity unit root test and then apply the newly ESTAR nonlinear unit root test suggested by Kruse (2011). This test has higher power than conventional unit root tests when time series exhibits nonlinear behaviour. Our empirical findings provide significant evidence in favour of unemployment rate stationarity for 25 countries. For robustness purpose, we have also used panel unit root tests without and with structural breaks. The empirical results show that unemployment hysteresis hypothesis is strongly rejected, when taking into account the cross-sectional and structural break assumptions. Thus, unemployment rate is expected to return back to their natural levels without executing any costly macroeconomic labour market policies by the OECD’s governments.

Keywords: Unemployment; Unit root; Labour market policy; OECD (search for similar items in EconPapers)
JEL-codes: C23 E24 J48 J64 N30 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Are Unemployment Rates in OECD Countries Stationary? Evidence from Univariate and Panel Unit Root Tests (2016) Downloads
Working Paper: Are Unemployment Rates in OECD Countries Stationary? Evidence from Univariate and Panel Unit Root Tests (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940818301050

DOI: 10.1016/j.najef.2018.08.021

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