External Shocks, Structural Breaks and Unemployment Hysteresis in China

Abstract

This paper aims to investigate the unemployment hysteresis hypothesis, in which the endogenously determined break points are incorporated, by using annual data of actual urban unemployment rates during 1978-2009 in China. We treat the break date as unknown and utilize recursive, rolling and sequential tests to determine the endogenous structural breaks which are caused by external shocks. Our empirical findings show that three structural breaks existed in the time series of China’s actual urban unemployment rates and we can not reject the unit-root hypothesis, which is consistent with the hysteresis hypothesis of unemployment. Key words: Structural breaks; Unemployment hysteresis; External shocks