Hysteresis in the Australian Unemployment Rate

Abstract:     
This study analyses the reasons why the prevalance hysteresis in the Australian unemployment rate causes the unemployment rate to deviate from the natural rate during the study period 1966-1991. A simultaneous equation model is specified to illustrate the channels that generate hysteresis in the unemployment rate. Thw model is validated using log differenced labour market variables to ensure stationrity. The empirical results demonstrate that the atrophy of human capital due to long-term unemployment and insider power are major causes of hystersis. The study also sheds light on the controvesy relating to the corporatist ethos generated by enterprise bargaining based on the various Accords. The study concludes in favour of initating activist policies to combat the hysteresis in the unemployment rate.

Number of Pages in PDF File: 21

Keywords: Unemployment Rate, Natural Rate Hypothesis, Hysteresis, Accords, Insider power, Simultaneous Equation Models

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