A Markov-switching vector equilibrium correction model of the UK labour market

Massimiliano Marcellino, Grayham Mizon and Hans-Martin Krolzig

Empirical Economics, 2002, vol. 27, issue 2, 233-254

Abstract: There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. In this paper we present a statistical model that offers a congruent representation of part of the UK labour market since the mid 1960s. We use a cointegrated vector autoregressive Markov-switching model in which some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component. The long run dynamics are characterized by one cointegrating vector relating unemployment to trend-adjusted real wages and output. Despite there having been many changes affecting this sector of the UK economy, the Markov-switching vector-equilibrium-correction model with three regimes (representing recession, normal growth, and high growth) provides a good characterization of the sample data, and performs well relative to alternative linear and non-linear models. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established, and demonstrate the advantages of generating regime dependent responses.

Keywords: Business Cycles; Employment; Impulse-Response Analysis; Cointegration; Regime Shifts; Markov Switching. (search for similar items in EconPapers)
JEL-codes: C32 E24 E32 E37 (search for similar items in EconPapers)
Date: 2002-04-26
Note: Received: December 2000/Final Version Received: August 2001
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Citations: View citations in EconPapers (74)

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