Explaining shifts in the unemployment rate with productivity slowdowns and accelerations: a co-breaking approach

We investigate the controversial issue whether unemployment is related to productivity growth in the long run, using U.S. data in a framework of infrequent mean shifts. Tests find (endogenously dated) shifts around 1974, 1986, and 1996, system techniques indicate that the shifts are common features, and the implied long-run link between the two variables is negative. Therefore the secular decline of unemployment since the mid 1990s indeed stemmed from higher average productivity growth. The initial and final regimes are essentially equal, thus supporting theories that explain the productivity slowdown by a slow adoption process of IT with associated learning costs.