Testing for Unemployment Hysteresis in Selected Transition Economies

Abstract

This study aims to examine the hysteresis hypothesis in unemployment using panel data of 11 Asian countries covering the period 1980-2012. We employ the second generation panel unit root tests recently advanced by Smith et al. (2004). These tests have an advantage as they are able to exploit the cross-section variations of the series. This study provides strong empirical evidence against the hysteresis hypothesis in unemployment for the Asian countries. Finding shows that the unemployment rates of these countries have a tendency for meanreverting. As such, an increase in the unemployment rates is most likely only temporary. Hence, policy makers may not require short-run policies to curb the problem of rising unemployment. Instead, they may consider to pursue long-run strategies for strengthening the fundamental of the domestic labour markets. More importantly, the finding suggests that these countries will benefit from having a wider choice of fiscal and monetary policies as the polices may not result in the long-run negative impact on the unemployment rates.