Unemployment Rate Hysteresis and the Great Recession: Exploring the Metropolitan Evidence

30 Pages Posted: 27 Jul 2013 Last revised: 26 Nov 2017

See all articles by Giorgio Canarella

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics; University of Nevada, Las Vegas

Rangan Gupta

University of Pretoria - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Stephen K. Pollard

TUI University

Date Written: July 26, 2013

Abstract

This paper explores the mean-reverting behavior of the unemployment rate using monthly geographically disaggregated data for the period 1991:01 through 2012:02. We apply both standard unit-root tests and tests that allow for one and two structural breaks in the mean. We find evidence that favors both unit-root and stationary processes. No series exhibits stationarity around a constant mean, which does not support the traditional natural-rate hypothesis, but about half of the series exhibit stationarity around a shifting mean. For these series, we find that the break occurs at the Great Recession. To complement the unit-root analysis, we also examine the behavior of the series using the Bai and Perron methods to detect multiple regimes at unknown points of time. We find that the Great Recession also altered the persistence of the unemployment rate series over the identified regimes. In general, the values of the estimated persistence within regimes decrease between those regimes, implying faster absorption of shocks later in the sample period.

Keywords: structural break tests, hysteresis, Great Recession, unit root, MSA unemployment rate, mean reversion

JEL Classification: C22, E24, R10, R23

Suggested Citation

Canarella, Giorgio and Gupta, Rangan and Miller, Stephen M. and Pollard, Stephen K., Unemployment Rate Hysteresis and the Great Recession: Exploring the Metropolitan Evidence (July 26, 2013). Empirical Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2298877 or http://dx.doi.org/10.2139/ssrn.2298877

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics ( email )

Los Angeles
Los Angeles, CA 90032
United States

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Stephen K. Pollard

TUI University ( email )

5665 Plaza Dr., 3rd Floor
CA, 90630
Cypress, CA 90630
United States

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