HYSTERESIS HYPOTHESIS IN UNEMPLOYMENT AND LABOUR FORCE PARTICIPATION RATES: EVIDENCE FROM AUSTRALIAN STATES AND TERRITORIES

This article simultaneously investigates the hysteresis hypothesis of unemployment and labour force participation using regional level data in Australia. The conventional univariate and panel unit root tests indicate that the hysteresis hypothesis cannot be rejected for most of the regions in Australia. To further confirm if the hysteresis finding in unemployment and labour force participation results from not considering structural breaks. We employ a panel stationarity test recently developed by Carrion-i-Silvestre . (2005), which considers multiple structural breaks and cross-sectional dependence. The test results lend support for unemployment hysteresis and participation regime-wise stationarity. Accordingly, the findings imply that a temporary shock may have permanent effects on the unemployment rate but not on labour force participation in Australia and thus call for policies aimed at improving the adjustment mechanism in unemployment.