Testing for unemployment hysteresis in Turkey: evidence from nonlinear unit root tests

Abstract

Unemployment rate is one of the most critical indicators of labor market and is generally an important measurement tool to identify the status of the economies of countries. The impact of transitory shocks on unemployment is analyzed via the Natural Unemployment Rate-NAIRU and the Hysteresis Hypothesis. The term hysteresis describes a situation in which transitory shocks have persistent effects. According to hysteresis hypothesis, the cyclical supply shocks lead to structural changes and have a persistent effect on unemployment in the long run. Therefore this causes the natural unemployment rate to go up. Unemployment is an important economic problem for Turkish economy. Finding a solution to the unemployment problem that causes significant economic and social problems is one of the most important fields of work for policymakers. Therefore, it is important to identify the impact of transitory shocks on unemployment in order to develop effective employment policies to solve the unemployment problem. Different from the other studies in literature that made use of linear techniques, the presence of the hysteresis hypothesis for Turkey is analyzed using the nonlinear unit root tests Kapetanios et al. J Econom 112 359-379, (2003) and Kruse Stat Pap 52 71-85, (2011) for the period 1970-2014. The findings indicate that the hysteresis hypothesis is not valid for Turkey.