Unemployment Persistence : Does the Size of the Shock Matter ?

One of the stylized facts of unemployment is that shifts in its mean rate between decades and half-decades account for most of its variance. In this paper, we use a purely statistical analysis based on nonparametric densitity estimation techniques to identify the dates of infrequent changes in the mean of the unemployment rate series of seventeen countries. We find that in most countries, unemployment persistence is small one the (infrequently) changing mean rate has been removed. The changes in the mean rate coincide with the largest single annual changes in actual unemployment. We conclude that the observed persistence in unemployment appears to be consistent with hysteresis models which explain why unemployment hysteresis arises following large shocks to unemployment, but not following small changes. The result poses a challenge to theorist since existing hysteresis models do not have this non-linearity property.