Funding Scheme

RGC Faculty Development Scheme

Project Title

Doubts on Natural Rate of Unemployment: Evidence from Asian and OECD Countries

Project Team (HSMC Staff) 

Dr Ben CHENG, Department of Economics & Finance (PI)

Other Collaborating Parties

N/A

Project Period

1-1-2019 to 31-12-2020 (on-going)

Funding Amount (HKD)

$404,325

Abstract

The global financial crisis, triggered by the collapse of US subprime mortgage market in 2008, has resulted in persistent and high unemployment rates in many countries all over the world. High unemployment is a major concern of the government since it has a serious negative impact on economic growth and leads to many social problems in many countries. In many countries, the unemployment rates tend to stay persistently at a high level over time rather than returning to a normal level, natural rate, after a short period of time. People cast doubt on the presence of natural rate of unemployment in those countries. There has been an ongoing debate among theorists of natural rate, structuralist and hysteresis for many decades. A wide spectrum of linear, panel and non-linear unit root tests has been developed to test the hysteresis hypothesis against the alternative natural rate of unemployment hypothesis. However, empirical results remain inconclusive.

This study aims to revisit the nature of unemployment dynamics in selected Asian and Organization for Economic Cooperation and Development (OECD) countries by employing a novel nonlinear unit root test, that is truly general for all transitional stationary autoregressive models, developed by Park and Shintani (2016). The purpose is to detect the presence of natural rate of unemployment, hysteresis in unemployment due to economic shocks and the possibility of a natural rate shift due to structural changes. The findings of this study may shed light on the policies aim at boosting the employment of an economy.