Lee, George. 'Barrington Lecture 1989/1990: Hysteresis and the natural rate of unemployment in Ireland'. - Dublin: Journal of the Statistical and Social Inquiry Society of Ireland,Vol. XXVI, Pt. II, 1989/1990, pp31-68
Journal of the Statistical and Social Inquiry Society of Ireland Vol. XXVI, Pt. II, 1989/1990
Conventional Keynesian or Classical macroeconomic theories must be considered
inadequate to explain unemployment experiences such as the Irish
one. Rigidities that one might associate with fixed contracts, or even
adjustment costs in relation to prices or quantities, can hardly account
for 17 years of rising unemployment. Indeed, surely such an upturn in
conjunction with the apparent breakdown of the unemployment-inflation
relationship serves to challenge the existence in Ireland of a stable "natural"
rate of unemployment towards which the economy would gravitate
and at which the level of inflation would remain constant.
Within this context it is compelling to consider the existence of hysteresis
in the labour market - i.e. the possibility that an increase in umemployment
could have a direct impact on the natural rate or, to put it another way,
that this year's equilibrium unemployment depends upon last year's actual
This paper examines the presence of hysteresis in the Irish labour market
and in so doing enables estimates for the Irish natural rate of unemployment
to be calculated. In all cases the long-term equilibrium rate of
unemployment is considered to be the same as the natural rate.
In Section 2 competing explanations for the hysteresis phenomenon, specifically physical capital, human capital and insider (union members)-outsider
(non-union members) explanations are discussed. The following section
briefly considers some econometric issues which may arise in the presence
of hysteresis while Section 4 is concerned with some discrete time dynamics
associated with the natural rate of unemployment. In Section 5
a procedure for testing for hysteresis is derived from the analysis in the
preceding two sections. The paper then goes on to apply this test to Irish
data and discusses the implications of the results. Since no such work
has been done in an international context, it was not possible to compare
the Irish outcome with that for other economies. In so far as possible
mathematical considerations are dealt with in the appendices.
Please note: There is a known bug in some browsers that causes an
error when a user tries to view large pdf file within the browser window.
If you receive the message "The file is damaged and could not be
repaired", please try one of the solutions linked below based on the
browser you are using.
Items in TARA are protected by copyright, with all rights reserved, unless otherwise indicated.