Abstract
Two alternative approaches can be found in the literature on the dynamics of unemployment. The first approach is based on the theory of a natural rate of unemployment. Under this theory, the economy can depart from the natural rate of unemployment in the short term due to nominal shocks, but in the long term the economy is expected to achieve an equilibrium indicated by the natural rate of unemployment. The second approach to the dynamics of unemployment is the so-called hysteresis of unemployment theory. According to this theory, all shocks to unemployment will have a permanent effect on the natural rate of unemployment. In a statistical sense, these two theories boil down to testing the unit root. If the unemployment rate is a non-stationary series with a unit root, then the hysteresis-in-unemployment hypothesis has to be accepted. On the other hand, if the unemployment rate is a stationary series then the hysteresis hypothesis is rejected in favour of the natural rate theory.
Highlights
There are two alternative approaches in the literature on the dynamics of unemployment
It was found that the unemployment rate in Poland is a nonlinear process
From an economic policy point of view, the nonlinearity of unemployment has an important policy implication, since, as Bean [1997] points out, unemployment does not respond in the same way as expansionary and contractionary shocks
Summary
There are two alternative approaches in the literature on the dynamics of unemployment. The first approach is based on the theory of the natural rate of unemployment introduced by Friedman [1968] and Phelps [1967, 1968]. Under this theory, the economy can depart from the natural rate of unemployment in the short run due to nominal shocks. The authors suggested that high and persistent unemployment is the result of nominal or real shocks. They argued that theories advocating the existence of a natural rate of unemployment or a non-accelerating inflation rate of unemployment (NAIRU) failed to identify the endogenous impact of a surge in unemployment on the long-run natural rate
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
