Testing for hysteresis : unemployment persistence and wage adjustment

This paper proposes a new testing strategy for unemployment hysteris as the joint restriction of a unit-root in the unemployment rate and no-effect of the level of unemployment in the Phillips wage equation. The relevant test statistics are derived when this joint restriction is imposed during estimation and when a sequential two steps testing strategy is adopted. The empirical application leads to rejection of the null hypothesis of wage hysteresis for most of our sample of OECD countries. We get an interesting contrast between the "core European countries" -rejecting hysteresis, but not unemployment non-stationarity- and the scandinavian ones where unemployment appears to be stabilized despite a lack of the wage correction.