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, the authors use a statistical analysis based on switching regression models and nonparametric density estimation techniques to identify the dates of infrequent changes in the mean of the unemployment rate series of 17 countries. They find that in most countries, unemployment persistence is small once the (infrequently) changing mean rate has been removed. The changes in the mean rate coincide with large annual changes in actual unemployment. The conclusion is that the observed persistence in unemployment appears to be consistent with unemployment hysteresis arising after large shocks to unemployment, but not after small changes. The result poses a challenge to theory, since most existing hysteresis models do not have this non-linearity property.