Hysteresis in Unemployment: Evidence from OECD Estimates of the Natural Rate
This paper studies the dynamics of unemployment (u) and its natural rate (u*), with u* measured by real-time estimates for 29 countries from the OECD. We find strong evidence of hysteresis: an innovation in u causes u* to change in the same direction, and therefore has permanent effects. For our baseline specification, a one percentage point deviation of u from u* for one year has a long-run effect of 0.16 points on both variables. When we allow asymmetry, we find, perhaps surprisingly, that decreases in u have larger long-run effects than increases in u.
We are grateful for comments and suggestions from Olivier Blanchard, N. Gregory Mankiw, and Lawrence Summers. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.