A Sectoral Analysis of Hysteresis in Unemployment: Evidence from Turkey

One of the most important issues that the Turkish economy must overcome is the problem of unemployment. Several theories have been proposed to explain the existence of high unemployment rates. Traditional theories, sometimes referred to as equilibrium unemployment rate theories, describe movements in the unemployment as fluctuations around the natural rate. However, these theories have been challenged by hysteresis theories, which have become the popular explanations for the increase in unemployment. This paper tests hysteresis effects in sectoral and general unemployment using data from Turkey for the period 1988-2008. The paper applies univariate time series unit root tests with and without structural break to test for unemployment hysteresis in Turkey versus the alternative of a natural rate. Similar to previous empirical research, the results point to the rejection of the hysteresis hypothesis and are compatible with the structuralist theories as described by Phelps (1994).