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Can the Insider-Outsider Theory Explain Unemployment Hysteresis in OECD Countries?

Dimitrios Bakas () and Yousef Makhlouf

NBS Discussion Papers in Economics from Economics, Nottingham Business School, Nottingham Trent University

Abstract: The insider-outsider theory has been commonly used to explain the hysteretic behaviour of unemployment. However, there is no empirical evidence about the validity of insiders’ power on explaining the persistence of unemployment. This paper, using panel unit root tests that allow for the presence of covariates, addresses this gap and examines whether the insider-outsider theory, by means of various labour market proxies, can explain the hysteresis hypothesis for the OECD countries over 1960-2013. Our results show that although unemployment rate exhibits a pronounced hysteretic behaviour in OECD countries, this behaviour is reversed once we consider the insider-outsider proxies as covariates. This validates the role of insiders’ power as a key source of unemployment hysteresis.

Keywords: Insider-outsider theory; Hysteresis; Unemployment; Panel unit root tests (search for similar items in EconPapers)
JEL-codes: C23 E24 J51 J64 (search for similar items in EconPapers)
Date: 2017-07
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http://www.ntu.ac.uk/__data/assets/pdf_file/0035/3 ... khlouf_WP_2017_7.pdf First version, 2017 (application/pdf)

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