Time variation in the persistence of unemployment over the past century

Abstract

This paper investigates the persistence of the unemployment rate for the UK and the US over the past century by modeling the persistence to randomly evolve over time. The estimated autoregressive coefficient exhibits significant variation over time indicating the fluctuation between the hysteresis and mean-reverting phases. We find that the hysteresis phase is, to a considerable extent, associated with economic downturns caused by macroeconomic shocks, with the unemployment rate during this phase showing large deviations from the estimated natural rate of unemployment. In contrast, for the periods conforming to the natural rate theory, the actual unemployment rate fluctuates relatively closely around the estimated natural rate of unemployment.