Hysteresis of unemployment rates in Africa: new findings from Fourier ADF test

Abstract

We investigate the existence of the unit root hypothesis in the unemployment rates of 42 African countries using the Fourier ADF test. The essence is to clarify if the hypothesis of hysteresis holds or unemployment rate is dubbed as having natural rate, that is, stationarity. Having considered a novel approach that considers the nonlinear Fourier and a structural break in the unit root testing framework, we find the classical unit root test wrongly accepting the hysteresis hypothesis of unemployment rate in selected African countries more than 60% of the cases. Meanwhile, our approach finds fewer cases of hysteresis in the unemployment rate than initially detected by the conventional classical test: the hysteresis hypothesis is found to hold in only seven countries (Algeria, Botswana, Cabo Verde, Congo DR, Guinea-Bissau, Liberia and Tanzania) out of the 42 African countries. This implies that with the exception of the seven countries mentioned, shocks to unemployment will be transitory and strong policy action will not be required to address unemployment challenges. This suggests that hysteresis effects will be offset overall since these are concentrated in smaller African economies and portends for a faster recovery to shocks in the broader African context. Robustness check proves the superiority of the Fourier unit root tests with structural break over other lower alternatives.