Detecting unemployment hysteresis

Abstract

"We construct a new Markov-switching unobserved components framework for the analysis of hysteresis effects. Our model unifies the ingredients of trend-cycle decomposition, identification of spillovers between the components and asymmetry over the business cycle. Employing the model for Germany and the U.S. over 55 years, we find that the decades-long upward trend in German unemployment is fully explained by hysteresis. The Great Recession was well absorbed because both hysteresis effects and structural unemployment were substantially reduced after institutional reforms. In contrast, U.S. unemployment did not evolve according to hysteresis, not even during the Great Recession." (Author's abstract, IAB-Doku) ((en))

Cite article

Klinger, S. & Weber, E. (2015): Detecting unemployment hysteresis. A simultaneous unobserved components model with Markov switching. (IAB-Discussion Paper 28/2015), Nürnberg, 17 p.