UNEMPLOYMENT HYSTERESIS IN MIDDLE-INCOME COUNTRIES

Wissem Boukraine

doi:10.20473/jde.v6i1.22617

Abstract

Business cycles pave the way for asymmetry in the unemployment rate behavior with rapid increases during recessions and slight decreases in expansions. It, in turn, may raise the non-accelerating inflation rate of unemployment and the cost in terms of inflation of any demand stimulus policy. The recent jump in unemployment worldwide due to the COVID-19 pandemic and the government’s stimulus package following it raises questions about the cost of such a decision. We use the smooth transition model (STR) to analyze unemployment dynamics on quarterly data over the last two decades for fifteen middle-income countries. Our results suggest the absence of hysteresis except for Bulgaria, Mexico, and Ukraine. Our policy recommendation for these countries is the necessity of labor market reforms, as hysteresis will considerably reduce any economic stimulus on unemployment.Keywords: Unemployment, hysteresis, STRJEL Classification: C10, J60

Highlights

The COVID pandemic moved household consumption habits to online shopping (Baker et al, 2020; Guerrieri et al, 2020) and reduced job vacancies (Forsythe et al, 2020) as low-skilled workers are unable to work from home (Montenovo et al, 2020) the fall in hours worked (Cowan, 2020)
From a sample of fifteen middle-income countries, we found evidence of unemployment hysteresis only in three of them, namely Bulgaria, Mexico, and Ukraine, as shown by the results of the Dickey-Fuller t-statistic breakpoint test based on the Akaike information criterion
The linearity tests we conducted proved that the unemployment in these three countries is asymmetric and fits into a first-order logistic specification

Summary

Introduction

The COVID pandemic moved household consumption habits to online shopping (Baker et al, 2020; Guerrieri et al, 2020) and reduced job vacancies (Forsythe et al, 2020) as low-skilled workers are unable to work from home (Montenovo et al, 2020) the fall in hours worked (Cowan, 2020). The previous closest results to ours, Oliskevych (2015)for Ukraine, Akdogan (2017) for Bulgaria and Khraief et al (2020) for Mexico among others countries, tested for the existence of the phenomenon in a single country or comparative studies without real focus on persistence or volatility as part of unemployment dynamics. Such features can be necessary first to determine which countries are the most vulnerable to labor market shocks and predict unemployment response to economic stimulus.

Literature review

Finding and Discussion

Conclusion