Evaluating the Persistence and Structuralist Theories of Unemployment from a Nonlinear Perspective

This paper assesses empirically two competing accounts of high unemployment, the structuralist and persistence theories. It identifies one structural break in UK and German unemployment around 1980 which is more severe in both absolute and relative terms than that for the US in 1973. This offers support for the structuralist theory. A nonlinear, momentum-TAR model is used to capture fast-up, slow-down unemployment dynamics. Impulse response functions suggest that the half-lives of shocks are longer in the post-break subsamples, especially in Europe, which places the persistence theory closer to the mark. We conclude that elements from both theories are needed for an adequate account of unemployment dynamics