Hysteresis in the development of unemployment: the EU and US experience

Abstract

We examine hysteresis in EU and US unemployment by panel unit root tests. First generation tests indicate that unemployment is stationary. Second generation tests show mixed results. Idiosyncratic components are stationary in the US. A unit root in the US common component depends on the starting point of the sample. While the common component is nonstationary over the whole period, it is mean-reverting after initial observations are dropped. Hysteresis in EU unemployment is attributed to idiosyncratic, but not to common components. The findings might reflect a different regulation of labour markets and a lower degree of migration in the EU.