SOME EVIDENCE ON HYSTERESIS IN UNEMPLOYMENT RATES

We propose an unobserved components model to evaluate unemployment dat a for evidence on hysteresis effects. Unemployment is decomposed into a natural rate component, assumed to be nonstationary, and a cyclical component, assumed to be stationary. Hysteresis effects are modelled b y allowing lagged cyclical unemployment to affect the current natural rate. The model is estimated using Canadian, German, U.K., and U.S. un employment rate series. We find substantive hysteresis effects in the Canadian, German, and U.K. unemployment series. Hysteresis effects in the U.S. unemployment series are negligible.