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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Is Hysteresis Important for U.S. Unemployment?
John M. Roberts and Norman J. Morin

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.

Keywords: Hysteresis, unemployment, Phillips curve, unit roots

Full paper (275 KB PDF)

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Last update: December 21, 1999