An Econometric Study on the Validity of the Unemployment Hysteresis Hypothesis in EU-15 and EU-28

Abstract

Unemployment is among the main economic problems not only for developed countries but also for underdeveloped countries. The European Union, which was mostly composed of developed Western European countries until 2004, has grown with the participation of Eastern European countries in the following years. In its current form, the European Union consists of countries with different levels of development. The European Union should undoubtedly consider this structure of the union in the economic policies it develops. The existence of unemployment hysteresis, which shows the situation in which unemployment, which increased after an economic shock, does not return to its former levels, is important for policymakers of the union countries, especially in terms of methods of combating unemployment. This study aims to examine unemployment hysteresis for the EU-15 and EU-28 over the average values in the 2001Q1-2019Q4 period. In addition to the traditional unit root tests of Augmented Dickey Fuller (ADF) and Phillips Perron (PP), the Fractional Frequency Fourier ADF Unit Root Test developed by Bozoklu et al. (2020) has been used as the methodology. The data are obtained from Eurostat, the official website of the European Union where statistics are published. As a result of the study, evidence is found that the hysteresis hypothesis is valid in EU-15 and EU-28 according to all three analyzes used. In the study, the use of the Fractional Frequency Fourier ADF Unit Root Test, which is the most up-to-date test, contributes to the literature.