Multiple unemployment equilibria and asymmetric dynamics—Norwegian evidence

Abstract

A high degree of persistence in European unemployment rates is often termed unemployment hysteresis, which is equated with the presence of a unit root in unemployment series using linear models. However, the implications of this practice are difficult to reconcile with existing evidence on long run unemployment behaviour and the asymmetric response of unemployment to positive and negative shocks. This paper investigates whether the persistence and asymmetric response to positive and negative shocks may be due to the existence of multiple equilibria. Using Norwegian unemployment data, which share important characteristics with other European unemployment series, this paper characterises unemployment behaviour by applying a logistic smooth transition autoregressive (LSTAR) model. It appears that unemployment is a stationary variable that has switched between two stable equilibria during the period 1972–2003. The paper demonstrates that a large shock, or a sequence of small shocks, may cause a transition from one equilibrium level to another and that unemployment responds asymmetrically to large positive and negative shocks, but symmetrically to small shocks.