Keywords: Hysteresis, unemployment, Phillips curve, unit roots
Abstract: We look for evidence of "hysteresis" in the U.S. unemployment
rate - that is, that current labor market outcomes affect the future
equilibrium level of the unemployment rate. We first examine (using
a variety of econometric tests for unit roots) whether the unemployment
rate tends to come back to a long-run average over time. On balance,
our results suggest that the unemployment rate tends to return to a
long-run value, ruling out the possibility of permanent hysteresis.
We look for evidence of temporary hysteresis by examining whether
lagged unemployment enters a standard Phillips-curve model of U.S.
inflation. We find week evidence in support of temporary hysteresis,
but the effect is not large, suggesting that hysteresis is not very
important for U.S. unemployment.
Full paper (275 KB PDF)
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Last update: December 21, 1999