Evaluating The Persistence And Structuralist Theories Of Unemployment

This paper uses a threshold autoregressive (TAR) framework to assess the relative importance of structural breaks and asymmetric persistence in accounting for the post-war unemployment experience. In comparing unemployment patterns across time periods and countries, we take the US as a representative flexible labour market and Germany as an archetypically inflexible one, with the UK occupying an intermediate position. Significant breaks are detected in the UK and German series around 1980 suggesting a sharp increase in their respective natural rates. Evidence of asymmetries is also found in the dynamics of unemployment with rapid mean reversion following booms and persistence in the wake of recessions. We conclude that shifts in the natural rate explain differences over longer periods such as decades while asymmetric persistence can shed light on the short to medium run differences.