Abstract
This paper uses data for the UK and the Netherlands (1983q4–2011q4) to test if hysteresis occurs in these economies, and through what mechanisms. The novelty of the paper resides in the use of a VAR-IRF that encompasses previous hysteresis studies, using long-term unemployment, productivity, capital stock and real long-term interest rates, and in the use of specific Labour Market Institutions shocks, such as benefits, taxation or unions’ power. This allows us to disentangle what specific demand and supply-variables affect unemployment in the long-run, i.e. the NAIRU. Our findings suggest that there is hysteresis in both countries, and that it happens through several channels. Further, we find that the influence of Labour Market Institutions on unemployment depend on their impact on the real wages-productivity gap. These results have implications for structural and macroeconomic policies that we also discuss. Finally, we investigate the impact of different supply and demand-shock on long-term unemployment and discuss the relevant policy implications.
Highlights
This paper investigates if hysteresis occurs in the UK and the Netherlands and what demand variables make this phenomenon possible
This paper investigated whether there is hysteresis in the UK and the Netherlands and what demand-factors can cause such phenomenon
We find evidence of hysteresis in the UK and the Netherlands since the 1980s
Summary
This paper investigates if hysteresis occurs in the UK and the Netherlands and what demand variables make this phenomenon possible. This approach cannot disentangle what demand-factors, e.g., long-term unemployment or capital stock, propitiate unit roots This problem does not arise in other branches of the literature that aim at testing specific hysteresis mechanisms rather than the properties of unemployment series. Our paper extends available literature by estimating a VAR-IRF that allows us to test for hysteresis effects through unemployment duration, productivity, capital stock and real long-term interest rates. This helps us disentangle what specific demand-factors affect unemployment in the long run while controlling for the interactions in the labour market and avoiding potential biases that existing literature might be subject to.
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