Unit roots and trend breaks in the Greek labor market

Abstract

Purpose – The purpose of this paper is to examine the time series behavior of Greek labor market series by providing an empirical perspective on trend breaks and unit roots. Trend breaks represent aggregate behavior responses to “infrequent” changes in economic fundamentals, including changes in fiscal or labor market conditions, as have been perceived in Greece during the last years. Unit roots reveal whether “regular” shocks have significant effects on the level of the series over a specified finite horizon. Design/methodology/approach – The authors employ recent procedures that deal with the “circular testing problem” between tests on the parameters of the trend function and unit root tests that often arises in empirical applications. These techniques assess trend function stability and are robust regardless of whether the noise component is stationary or having a unit root. Then, conditional on the presence of breaks, the authors test whether the series can be characterized by a stochastic trend. Findings – The analysis provides evidence of “infrequent” trend breaks that appear to coincide with the recent global economic crisis and the implementation of the counteraction (fiscal) measures to the Greek debt crisis. Allowing for trend breaks does not lead to a rejection of the unit root hypothesis, which might reflect the low flexibility of the country’s labor market operation. Practical implications – The procedures employed can be viewed as new tools that might help empirical researchers to explore more accurately the characteristics of individual time series and to find reasonable approximations to the true processes of the time series examined. Originality/value – The paper provides new information on the presence of structural changes in the Greek labor market, and on whether the “aggressive” and “occasional” nature of fiscal measures can be approximated by infrequent changes in the slope of the trend function.