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Unemployment rate hysteresis and the great recession: exploring the metropolitan evidence

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Abstract

Standard unit-root tests of the hysteresis hypothesis specify a unit root under the null against the stationary alternative of the natural-rate hypothesis, making the two theories of unemployment mutually exclusive over the sample period. In this paper, we allow switches between hysteresis and natural-rate theory using the Kejriwal, Perron, and Zhou test. The null hypothesis of the test is that the unemployment rate is I(1) throughout the sample, and the alternative hypothesis is that the unemployment rate changes persistence [i.e., switches between I(0) and I(1) regimes]. We apply the test to the unemployment rate of 20 metropolitan statistical areas (MSAs) and the USA. We use monthly observations over the period 1990:1–2016:12 and apply the test to seasonally unadjusted and seasonally adjusted data. Important differences exist between these tests. We find that with seasonally adjusted data, the Great Recession associates with a change in persistence from I(0) to I(1) in eight MSAs and the USA and to a change from I(1) to I(0) in six MSAs. Conversely, with seasonally unadjusted data, the Great Recession only associates with a change in persistence from I(0) to I(1) in four MSAs and to a change from I(1) to I(0) in three MSAs. This differential resilience to the shocks of the Great Recession provides a new aspect of the heterogeneity of the US labor markets.

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Notes

  1. Analysis of the hysteresis hypothesis is not confined to unit-root testing. Alternative approaches include, among others, fractional integration models (Gil-Alana and Henry 2003), Markov-switching models (Bianchi and Zoega 1998), and threshold models (Coakley et al. 2001).

  2. We note that the mainstream macroeconomic literature differs somewhat from the recent econometric literature on the use of the term “persistence.” In the former case, persistence refers to the speed of adjustment of a macroeconomic process to economic shocks and is generally measured by the sum of the coefficients in an autoregressive process, which is assumed to be I(0). In contrast, the literature on breaks in persistence concerns switches in the order of integration of the process.

  3. A few analyses use state-level data in conjunction with panel unit-root tests. Song and Wu (1997), using the Levin et al. (2002) panel unit-root test, find that hysteresis does not characterize the unemployment rate dynamics of the US states. León-Ledesma (2002) reaches similar conclusions, using the Im et al. (2003) panel unit-root test. Cheng et al. (2012), on the contrary, employing the PANIC method that permits cross-sectional dependence between the US states find strong evidence of hysteresis in state-level data, especially when the tests include the new data from the recent Great Recession. Clemente et al. (2005) use national, regional, and state-level data to construct panels for the nine divisions and four regions considered by the US Census. They provide evidence against a unit root for the US economy and most of the US states. The evidence against a unit root weakens when considering the Census nine divisions, and even weaker when considering the four Census regions. They conclude, therefore, suggesting that the time-series properties of the unemployment rate may depend, among other things, on the assumed level of disaggregation. García-Cintado et al. (2015) find strong support for the hysteresis hypothesis in Spanish regional unemployment rates. Lanzafame (2012) rejects the hysteresis hypothesis in Italian regional unemployment rates. Fallahi and Rodriguez (2011) investigate the degree of persistence in the Canadian provinces allowing for structural breaks and find evidence against the hysteresis hypothesis.

  4. Although the issue of seasonal adjustment does not appear to have received attention in the context of tests of change in persistence, the issue may prove even more important in this context, since the tests relate to the long-run properties of the data. Halunga et al. (2009) also use both seasonally adjusted and seasonally unadjusted monthly data to analyze changes in inflation persistence in the UK.

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Authors and Affiliations

  1. Economics, University of Nevada, Las Vegas, Las Vegas, NV, USA

    Giorgio Canarella & Stephen M. Miller

  2. Economics, University of Pretoria, Pretoria, South Africa

    Rangan Gupta

  3. College of Business Administration, Trident University International, Cypress, CA, USA

    Stephen K. Pollard

Authors
  1. Giorgio Canarella
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  2. Rangan Gupta
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  3. Stephen M. Miller
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  4. Stephen K. Pollard
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Correspondence to Stephen M. Miller.

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Canarella, G., Gupta, R., Miller, S.M. et al. Unemployment rate hysteresis and the great recession: exploring the metropolitan evidence. Empir Econ 56, 61–79 (2019). https://doi.org/10.1007/s00181-017-1361-z

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