Is there hysteresis in unemployment rates?

This paper investigates if there is hysteresis in unemployment rates for 8 OECD countries. Univariate unit root tests (ADF and KPSS tests) are performed as an initial analysis of the unemployment rates. These tests suggest that the hysteresis hypothesis is true. Since traditional unit root test have low power against fractionally integrated alternatives, the Sowell’s (1992) exact maximum likelihood (EML) ARFIMA estimator is used in the paper as well. The main advantage of using this estimator is since a quantitative measure of the memory parameters is given. As a consequence, tests of the estimated memory parameters can be conducted and a more refined analysis is possible. When the EML estimator is used, the result found by the ADF and KPSS tests are strengthened; there is hysteresis in unemployment rates