Explaining Unemployment in the Caribbean Again

Transcription

1 Explaining Unemploymen in he Caribbean Again Roland Craigwell Professor of Economics Universiy of he Wes Indies Cave Hill Campus, BARBADOS And Research Associae Research and Economic Analysis Deparmen Cenral Bank of Barbados, BARBADOS Allan Wrigh 1 Senior Economis Research and Economic Analysis Deparmen Cenral Bank of Barbados, BARBADOS Sepember 01 1 Corresponding Auhor: Telephone: (46) ; Address: allan.wrigh@cenralbank.org.bb 1

2 Absrac This paper aemps o deermine he main facors ha influence he high and persisen unemploymen raes in hree Caribbean counries Barbados, Jamaica and Trinidad and Tobago - using quarerly daa covering he pos 000 period. Unlike previous work, i shows by applying he mehod of dynamic ordinary leas squares ha he unemploymen phenomenon can be explained by he growh and volailiy of local income as well as income of hese counries leading rading parners. Several condiional variance models are also uilised o examine persisence volailiy in he unemploymen raes and he speed of recovery o long run equilibrium afer a shock Keywords: Unemploymen; dynamic OLS JEL No: J64; C; C3

3 1. Inroducion Since he 1970s unemploymen, especially among he youh, has increased gradually and remained a high levels in he majoriy of counries in he English-speaking Caribbean. Curren figures of 0 percen and above are no uncommon (see Ball and Hofseer, 009; Archibald, Lewis-Bynoe and Moore, 011; Craigwell, Mahouraparsad and Maurin, 011). This phenomenon of high and persisen unemploymen can have severe economic, social and poliical consequences associaed wih social insabiliy, povery, crime, ec. In addiion, he issue of high and persisen unemploymen has become even more imporan as people choose less o accep i, as hey are more informed abou he financial resuls relaed o he wealh creaed by firms, he disribuion of income and economic growh (Borda, Craigwell, Gbaguidi and Maurin, 01). I is herefore easy o undersand he renewed ineres in he problem of growing unemploymen. This paper ess he hypohesis ha he naural or long-run unemploymen rae in selec Caribbean counries Barbados, Trinidad and Tobago and Jamaica - can be mosly explained by he growh and volailiy of local income and income of hese counries leading rading parners. I builds on previous research in hree aspecs. One i considers he impac of income volailiy. Two, i uses a differen mehodology, ha is, i applies he dynamic ordinary leas squares (DOLS) procedure in he ime series and panel frameworks o examine he deerminans of he long run unemploymen rae as well as employs several condiional variance models o explain persisence volailiy in he unemploymen raes and he speed of recovery o long run equilibrium afer a shock. Finally, i uilizes quarerly daa and focuses on he pos 000 period; almos all oher sudies used annual daa covering a longer span saring from around he 1970s. 3

4 . Review of he Empirical Lieraure Pos 000 There have been several commenaries and descripions of he unemploymen phenomenon in he Caribbean region (see McInyre, 1975; Harewood, 1978; Farrell, 1980; Downes and Henry, 1994). However, because of he lack of labour marke informaion, economeric analyses of he deerminans of unemploymen in he region have been minimal. Craigwell and Warner (000) review his sparse empirical lieraure before 000 and found ha researchers concenraed on he more developed counries of he Caribbean Barbados, Jamaica and Trinidad and Tobago - probably due o he availabiliy of he daa. They furher concluded ha oupu changes is a key explanaory variable, and o a lesser exen, lagged unemploymen wih he impac of wages and prices somewha mixed. This secion provides an updae o Craigwell and Warner (000) using a similar abular review sysem (see he Appendix). The pos 000 survey on unemploymen empirics saw a drive o exend he sudies o he less developed counries of he Caribbean and o explore oher possible deerminans of unemploymen. I sared wih Downes, Mamingi and Anoine (004) who found ha he effec of seleced labour regulaions, namely he minimum wage, he conribuions o he Naional Insurance Scheme and severance paymens, had lile saisical significance in Barbados, Jamaica and Trinidad and Tobago. A lack of oupu growh was again idenified as he criical regressor creaing unemploymen in he Caribbean. The nex paper on unemploymen in he Caribbean region, done by Ball and Hofseer (009), used a combinaion of daa from 19 Lain American and Caribbean counries. They concluded ha rural populaion had a robus negaive saisical associaion in predicing he long run unemploymen rae while per capia growh, hough imporan, was no as influenial as previously hough. Archibald, Lewis- Bynoe and Moore (011), examining he issue of demand driven shocks on Caribbean 4

5 labour markes, found by applying an unbalanced panel model of he more developed and less developed counries in he region ha shocks o he global economy can have large effecs on unemploymen. The final piece of work underaken on unemploymen in he Caribbean applied nonlinear models o confirm he hyseresis hypohesis ha here is a kind of memory of evens leading o he immuabiliy of unemploymen even in he presence of changing circumsances in he labour marke (see Craigwell, Mahouraparsad and Maurin, 011). 3. The Empirical Model, Economeric Mehod and Daa 3.1. The Empirical Model Mos of he empirical sudies on unemploymen in developing counries like hose in he Caribbean, have focussed on he impac of he size of he rural populaion, educaional aainmen of he populaion aged 5 and over and wage levels wihin paricular secors of he economy (Michaelowa, 000). However, recen research have shown ha cyclical facors have a greaer effec in predicing he naural rae of unemploymen han hese variables (Archibald, Lewis-Bynoe and Moore, 011; Heckman and Pages, 004). In addiion, he lingering recession has had he mos derimenal influence on rising unemploymen and underemploymen wihin he Caribbean (Archibald, Lewis-Bynoe and Moore, 011; Heckman and Pages, 004). Given his background and he discussion in he preceding secion, he economeric model used here for unemploymen (UR ) in he Caribbean relies on a maximizaion approach ha aemps o deermine he impac of local and inernaional income growh. I uilizes hree leading variables, namely, per capia gross domesic produc ( PGDP ) of he local economies, GDP growh raes of he leading rading parners ( GR ) and he consumer price index ( CPI ) (Archibald, 5

6 Lewis-Bynoe and Moore, 011; Ball and Hofseer, 009). I is assumed ha he firs wo se of regressors (PGDP, GR,) will posiively impac he unemploymen rae wihin he markes of Barbados, Trinidad and Tobago and Jamaica. For he CPI, i is hypohesized ha unemploymen will decrease as prices rise. This can be raionalized hrough he new Keynesian Phillip s curve heory where an upward movemen in prices should expand expeced oupu and demand and reduce he level of unemploymen a leas in he shor run (Blanchard and Gali, 007). Formally, he model for he sudy is specified as: k 1 ( ) e (1) 1 i 1 1 where is he firs difference operaor, ( ) is a vecor which includes he dependen variable, ha is, he unemploymen rae (UR) and he independen variables of per capia GDP of he local economies, GDP growh raes (GR) of he main source markes (Europe, USA and Canada), and he relaive consumer price index (CPI), is he coefficiens of he naural rae of unemploymen wih respec o per capia GDP, GDP growh raes of he primary rading parners and prices as saed by Ball and Hofseer (009), is a vecor of deerminisic variables, α along wih δ are parameer esimaes and e is he random erm expeced o be whie noise. Since his model assumes a criical role for income growh on unemploymen in he Caribbean, i is expeced ha volailiy in he growh raes will adversely affec he unemploymen raes. As such volailiy models will also be invesigaed o decide he speed and persisence of an adverse shock. To ackle hese issues auoregressive condiional heeroskedasic (ARCH) and generalized auoregressive condiional heeroskedasic (GARCH) processes are frequenly used (Hamilon, 1988, 1989; Hoi e al., 005). This paper will consider hese and oher condiional variance models 6

7 (lised below in Secion 3.3) o examine wha deermines and explains persisence volailiy in Caribbean unemploymen raes and he speed of recovery o long run equilibrium afer a shock. 3. The Economeric Mehod: Panel Dynamic Ordinary Leas Squares The panel dynamic ordinary leas squares (PDOLS) model parially developed by Kao and Chiang (000) and Mark and Sul (003) is applied o deermine he long and shor run properies of he deerminans of unemploymen in he hree Caribbean markes of Barbados, Trinidad and Tobago and Jamaica. This procedure is based on he ime series version (DOLS) propounded by Saikkonnen (1991) and Sock and Wason (1993) and herefore provides efficien esimaes, is useful o esimae variables ha are saionary and non-saionary and behaves well in small samples as well as avoids endogeneiy issues. PDOLS esimaion involves hree seps. Firs, he sochasic naure of he variables are checked using he panel uni roo procedures of Levin, Lin and Chu (LLC) (00), and Breiung (00) [which have a common uni roo process as heir null hypohesis], Im, Pesaran and Shin (IPS) (00), and he Augmened Dickey Fuller - Fisher Chi-square (ADF) [which have individual uni roo processes] and he Hadri z-saisic which has a null hypohesis of no uni roo. Second, if he variables are non-saionary co-inegraion is examined uilising he residual based panel and group saisics ess of Pedroni (1999). Finally, he shor and long run facors impacing he unemploymen rae (UR) is deermined saring wih general specificaions ha are reduced o parsimonious models wih he reenion of saisically significan variables. The esimaion of he long run relaionship for Equaion (1) is based on he following regression: 7

8 UR k 0 i k 1 X X e () 1 where X is a vecor of all explanaory variables, X 1 is a subse of I(1) variables of X, is a vecor of long run coefficiens and e is a well behaved error erm. The leads and lags of he firs differenced I (1) regressors are included o deal wih he problems of endogeneiy and auocorrelaion. This paper ses k a 5 since quarerly daa is applied. To invesigae he shor run dynamics, he esimaes from Equaion () are used o derive a general error correcing model of he form: UR m 1 o 1 UR 1 X 3Z 1 ( 1 1 ) 1 UR X (3) 1 1 m 1 0 m 1 0 m i 1 Changes in he unemploymen rae are a funcion of is pas, lagged firs difference non-saionary variables (X 1 ), lagged saionary variables (Z) and he lagged error correcion erm. The shor run effecs are capured by 1, and 3 while he rae a which he unemploymen rae ( naural rae of unemploymen) readjuss o seady sae afer disequilibrium have occurred is given by. 3.3 The Condiional Variance Models The condiional variance models employed are as follows: (i) (ii) - ARCH (Engle, 198) i - GARCH (1,1) (Bollerslev and Taylor, 1986) 1 1 The shor run persisence ( ) is shown hrough he ARCH process while he GARCH specificaion wih a value of ( ) close o 1 indicaes ha volailiy shocks are quie persisen. To deermine if posiive and negaive cyclical shocks have a differenial impac on he naural rae of unemploymen or long run unemploymen, 8

9 he asymmeric processes of hreshold GARCH (TGARCH) and exponenial GARCH (EGARCH) are employed. Boh processes are ouline below: (iii) i i + i i - TGARCH (Glosen e al, 1993) In his model, posiive and negaive shocks have differenial effecs on he condiional variance: negaive shocks increase volailiy if 0, and < 0 implies posiive shocks which expand volailiy; while shocks are symmeric if 0. (iv) i i i i + - EGARCH (Nelson, 1990) i The model is asymmeric as long as 0. When 0, hen posiive shocks generae less volailiy han negaive shocks. Deermining he speed of recovery o long run equilibrium afer a shock, he componen GARCH (CGARCH) process is uilized. I is expressed as (v) m ( ) ( ) CGARCH (Ding e al, 1993) m i i i The speed of mean reversion o equilibrium is and a value close o 1 indicaes a rapid speed of adjusmen afer a shock and m is he ime varying long run volailiy. 3.4 Daa Quarerly daa is uilized in his paper covering he period 000Q1 o 011Q4 for hree Caribbean markes and were aken from he websies of he various cenral banks of hese counries, as well as from he Inernaional Moneary Fund s Inernaional Financial Saisics and he World Bank s Saisics Daabase. The dependen variable is he unemploymen rae (UR) and he independen variables are as follows: per capia GDP of he local economies, GDP growh raes (GR) of he main source markes (Europe, USA and Canada) and relaive consumer price index (CPI). Table 1 repors he descripive saisics. 9

10 Table 1:Descripive Saisics GDPUS GDPCAN GDPEUR CPIS_CPID PGDP UR Mean Median Maximum Minimum Sd. Dev Skewness Kurosis Commen [R1]: Please fix his able Jarque-Bera Probabiliy Sum 1.65E Sum Sq.Dev 3.47E E E Esimaion Resuls 4.1 Panel and Individual Counry The resuls of he panel uni roo ess menioned above revealed ha all he variables are inegraed of order 1 [I(1)], ha is, hey need o be differenced once o become saionary (see Table ). Checking for co-inegraing vecors among he variables using he residual based ess of Pedroni (1999) is nex, wih he resuls showing ha he null hypohesis canno be acceped (see Table 3), herefore he variables form a unique co-inegraed se. The long run deerminans of he PDOLS model are presened in Table 4. The funcion appears o be well specified and no non- normal resuls are presen. The variables - per capia GDP (PGDP), growh raes of he USA, Europe and Canada (GR USA, GR EUR, GR CAN ) - are shown o significanly influence he naural rae of unemploymen and have he a priori signs. The findings show ha cyclical changes in income have a criical impac on he unemploymen levels wihin he Caribbean markes ha are highly dependen on he source markes for rade and foreign 10

11 exchange earnings. No impacing he long run unemploymen rae is he consumer price index, which is a resul in line wih previous conclusions made by Blanchard and Gali (007). Table : Uni Roos Tess LLC Breiung IPS ADF PP Hadri Variable UR -3.87*** *** -1.76*** *** 10.81*** -0.56* PGDP *** ** -1.97*** 187.8*** 18.39*** -1.01* GR EUR *** *** -1.45*** *** 18.1*** * GR USA -6.90*** -3.76*** *** *** 15.71*** -0.81* GR CAN -18.8*** *** -17.7*** 17.43*** ** -1.1* CPI *** *** ** *** *** 0.91* Noe: ***, ** and * indicae significance a he 1, 5 and 10% level of esing, respecively. Table 3: Pedroni Residual Co-inegraion Tess Common AR Coefficiens wihin dimension Individual AR Coefficiens beween dimension Saisic P Value Saisic P Value Panel v.76*** Group *** rho Panel rho -1.76*** Group *** PP Panel PP -9.17*** Group *** ADF Panel ADF *** Noe: ***, ** and * indicae significance a he 1, 5 and 10% level of esing, respecively 11

12 Table 4: Long Run Coefficiens of he Naural Rae of Unemploymen (UR) UR PGDP 1.17 GR USA GR EUR 0.41GR CAN (10.53***) (- 3.95***) (-5.8***) (-8.61***) (-5.85***) Diagnosic Tess R = R = F = DW = 1.9 NORM = 5.37 AR = ARCH = 0.89 HET = RESET = 1.3 Noe: - saisics of regressors are shown in parenheses.. ***, ** and * indicaes significance a he 1, 5 and 10% level of esing, respecively. However, all diagnosics ess are performed a he 5% level of esing. R is he coefficien of deerminaion, R is he coefficien of deerminaion adjused for degrees of freedom, F is he F- Saisic for he join significance of he explanaory variables. DW is he Durbin Wason saisic and he NORM is he es for normaliy of he residuals based on he Jarque- Bera es saisics. AR is he Lagrange muliplier es for residual auocorrelaion and ARCH is he auoregressive condiional heeroscedasiciy. HET is he uncondiional heeroscedasiciy es based on he regression of squared residuals. Finally, RESET is he Ramsey es for funcional form misspecificaion. I is useful a his juncure o look a he individual counry long run resuls. This involves employing he DOLS procedure in he ime series conex, he seps of which are very similar o he PDOLS mehodology, ha is, es for uni roos and hen for co-inegraion. The resuls of he popular Augmened Dickey-Fuller, Phillips- Perron and Kwiakowski-Phillips-Schmid-Shin uni roo saisics (available on reques) reveal ha all he variables are I(1). The findings from he long-run funcions (Tables 5 o 7) indicae ha he hree models are well specified wih he correc a prior signs. For Barbados, he long run naural rae of unemploymen is significanly influenced by he GDP growh changes in Europe and he USA, he wo being i leading rading parners of domesic expors and privae equiy invesmen in ourism and he consrucion indusries. Trinidad and Tobago which is a more resource maerials (peroleum) based economy han Barbados, is less affeced by growh rae changes in he USA, Europe and Canada, han he exising wealh income wihin he local economy as measured by he per capia GDP level. The unemploymen rae for 1

13 Jamaica is significanly impaced by he business cycle in he Norh American markes and exising levels of income wihin he local economy. Table 5: Barbados Long Run Coefficiens of he Naural Rae of Unemploymen UR PGDP 0.86 GR USA GR EUR 0.53GR CAN (8.51***) ( ***) (-3.15***) (-4.98***) (-4.89***) Diagnosic Tess R = R = F = DW = 1.8 NORM = 3.19 AR = ARCH = 0.15 HET = 0.91 RESET = 0.94 Noe: - saisics of regressors are shown in parenheses.. ***, ** and * indicaes significance a he 1, 5 and 10% level of esing, respecively. However, all diagnosics ess are performed a he 5% level of esing. is he firs difference operaor. R is he coefficien of deerminaion, R is he coefficien of deerminaion adjused for degrees of freedom, F is he F- Saisic for he join significance of he explanaory variables. DW is he Durbin Wason saisic and he NORM is he es for normaliy of he residuals based on he Jarque- Bera es saisics. AR is he Lagrange muliplier es for residual auocorrelaion and ARCH is he auoregressive condiional heeroscedasiciy. HET is he uncondiional heeroscedasiciy es based on he regression of squared residuals. Finally, RESET is he Ramsey es for funcional form misspecificaion. Table 6: Trinidad and Tobago Long Run Coefficiens of he Naural Rae of Unemploymen UR PGDP 0.9 GR USA GR EUR 0.103GR CAN (7.11***) (- 3.10***) (-5.14***) (-9.01***) (-3.79***) Diagnosic Tess R = R = F = 56.6 DW = 1.93 NORM = AR = 0.71 ARCH = 0.31 HET = 1.34 RESET = 0.79 Noe: - saisics of regressors are shown in parenheses.. ***, ** and * indicaes significance a he 1, 5 and 10% level of esing, respecively. However, all diagnosics ess are performed a he 5% level of esing. is he firs difference operaor. R is he coefficien of deerminaion, R is he coefficien of deerminaion adjused for degrees of freedom, F is he F- Saisic for he join significance of he explanaory variables. DW is he Durbin Wason saisic and he NORM is he es for normaliy of he residuals based on he Jarque- Bera es saisics. AR is he Lagrange muliplier es for residual auocorrelaion and ARCH is he auoregressive condiional heeroscedasiciy. HET is he uncondiional heeroscedasiciy es based on he regression of squared residuals. Finally, RESET is he Ramsey es for funcional form misspecificaion. 13

14 Table 7: Jamaica Long Run Coefficiens of he Naural Rae of Unemploymen UR PGDP 1.63 GR USA - 0.3GR EUR 0.69GR CAN (6.00***) (-.87***) (-3.76***) (-6.77***) (-5.3***) Diagnosic Tess R = R = F = 15 DW = 1.98 NORM = 3.71 AR = ARCH = HET = 1.9 RESET = 0.83 Noe: - saisics of regressors are shown in parenheses.. ***, ** and * indicaes significance a he 1, 5 and 10% level of esing, respecively. However, all diagnosics ess are performed a he 5% level of esing. is he firs difference operaor. R is he coefficien of deerminaion, R is he coefficien of deerminaion adjused for degrees of freedom, F is he F- Saisic for he join significance of he explanaory variables. DW is he Durbin Wason saisic and he NORM is he es for normaliy of he residuals based on he Jarque- Bera es saisics. AR is he Lagrange muliplier es for residual auocorrelaion and ARCH is he auoregressive condiional heeroscedasiciy. HET is he uncondiional heeroscedasiciy es based on he regression of squared residuals. Finally, RESET is he Ramsey es for funcional form misspecificaion. Now reurn o he error correcing model for he panel daa. These resuls are oulined in Table 8. The model is well specified and is an adequae represenaion of he daa generaion process. The magniude of he coefficien on he error correcing erm (-0.319) reveals ha i will ake approximaely five periods for he naural rae of unemploymen o adjus o is long run equilibrium afer a shock. The variables (per capia GDP, growh raes of GDP from he leading indusrial naions and he consumer price index) are all significan wih he correc signs in he shor run. The resuls show ha cyclical and price changes have a imporan impac on he naural rae of unemploymen in hese hree Caribbean islands. 14

15 Table 8: Error Correcing Model of he Naural Rae of Unemploymen ( UR) UR = PGDP GR USA GR EUR-1 (.18**) (-4.6***) (-3.51***) (-8.4***) Diagnosic Tess R = GR CAN CPI ECT 1 (-9.35***) (-5.61***) (-1.86***) R = F = 176 DW = 1.81 NORM = AR = 0.46 ARCH = 0.9 HET = RESET = 1.65 Noe: - saisics of regressors are shown in parenheses.. ***, ** and * indicaes significance a he 1, 5 and 10% level of esing, respecively. However, all diagnosics ess are performed a he 5% level of esing. is he firs difference operaor. R is he coefficien of deerminaion, R is he coefficien of deerminaion adjused for degrees of freedom, F is he F- Saisic for he join significance of he explanaory variables. DW is he Durbin Wason saisic and he NORM is he es for normaliy of he residuals based on he Jarque- Bera es saisics. AR is he Lagrange muliplier es for residual auocorrelaion and ARCH is he auoregressive condiional heeroscedasiciy. HET is he uncondiional heeroscedasiciy es based on he regression of squared residuals. Finally, RESET is he Ramsey es for funcional form misspecificaion. 4. Volailiy Models To begin esimaing he condiional variance models he panel uni roo ess discussed above are applied o he deseasonalized series o check heir sochasic properies. The auoregressive properies of he variables are hen deermine uilizing he correlogram. Afer his, he maximum likelihood esimaion mehod is used o explore he effecs of economic shocks and volailiy on he mean unemploymen equaion as well as o check he presence of persisence in he variances. One aspec ha mus be deermined before is he naure of he condiional disribuion. To ascerain his, he uncondiional disribuions are compared o used disribuions such as he normal and, employing quanile plos. The naure of he condiional disribuion is hen found afer esing he disribuion residuals agains he normal, and generalized error disribuion. 15

16 The findings from he various univariae models indicae mosly ha he ARCH (1) and he GARCH (1, 1) processes wih residuals following a normal disribuion are appropriae. The covariance saionariy resricion was upheld and he Q- saisics show no significan evidence of serial correlaion. The ARCH models and is varians for he hree Caribbean markes include a volailiy componen in he mean equaion as unemploymen displayed changes o unexpeced shocks. The own spillover volailiy (ARCH) coefficiens are highes for Jamaica (0.73), followed by Barbados (0.58) and hen Trinidad and Tobago (0.36). The long run persisence parameer esimaes from he GARCH process were of more concern for Jamaica (0.89), han Barbados (0.70) and Trinidad and Tobago (0.48) as ha marke showed a bigger effec afer a cyclical shock. Wih significan coefficiens of 0.49 (Jamaica), 0.8(Barbados) and 0.51(Trinidad and Tobago) he EGARCH and TGARCH models reveal ha negaive shocks increase volailiy in all hree markes. Using he CGARCH framework, Trinidad and Tobago displayed he fases mean reversion afer a shock followed by Barbados and hen Jamaica. The above findings sugges ha Trinidad and Tobago, unlike Jamaica and Barbados, is less impaced by cyclical changes as refleced by lower long run persisence and a faser mean reversion afer a shock. This conclusion is in keeping wih he previous work of Archbald, Lewis-Bynoe and Moore (011) which reveals ha ouris dependen economies are generally more severely affeced by cyclical changes in he Norh Alanic markes han economies which have a sronger nonraded secor or are resource (minerals) rich. The adverse effecs of cyclical changes are likely also o be fel more by vulnerable groups wihin he sociey (such as he elderly, young and females). 16

17 Conclusion The paper shows wih he aid of he panel dynamic ordinary leas squares (PDOLS) mehodology ha he income levels of hree selec Caribbean counries, namely Barbados, Jamaica and Trinidad and Tobago, along wih he growh rae of heir leading source markes have a saisical significan impac on deermining he long run or naural rae of unemploymen. In he shor run along wih hese variables consumer prices also affec he unemploymen rae. The above resuls are differen from mos sudies conduced wihin he Caribbean, which usually aemp o deermine he naural rae of unemploymen by considering he level of secondary school enrollmen as a proxy for educaion, as well as he share of he rural populaion, wages and per capia GDP, using single equaion economeric models. This previous research failed o recognize ha income growh of he leading economies of he Norh Alanic rim, who are usually he major rading parners of goods and services from he Caribbean, is significan in explaining he long run or naural rae of unemploymen in hese markes, a resul ha is no dissimilar o he findings of Archibald e al (011). The paper also uses condiional variance models o provide evidence on how long he Caribbean markes will ake o reurn o an equilibrium poin afer a cyclical shock. Given he relaively lower long run persisence and he faser mean reversion, he aricle reveals ha Trinidad and Tobago, a resource (minerals) rich island is less impaced by cyclical changes han he ouris dependen economies of Jamaica and Barbados who are generally more severely affeced by cyclical changes in he Norh Alanic markes. 17

18 References Archibald, X., Lewis-Bynoe, D and W. Moore (011), Caribbean Labour Markes and he Grea Recession, mimeo, Caribbean Developmen Bank. Ball, L. and M. Hofseer (009), Unemploymen in Lain America and he Caribbean, mimeo, John Hopkins Universiy. Bollerslev, T. (1986), Generalised Auoregressive Condiional Heeroskedasiciy. Journal of Economerics 31: Blanchard, O. and J. Gali (007), A New Keynesian Model wih Unemploymen, Kiel Working Papers 1335, Kiel Insiue for he World Economy. Borda,P., Craigwell, R., Gbaguidi, D. and A. Maurin (01), Growh and Unemploymen in he Caribbean: An Empirical Analysis of Okun Law Using Markov Swiching Models, mimeo, in process. Breiung, J. (00), Non-Parameric Tess for Uni Roos and Co-inegraion. Journal of Economerics 108: Craigwell, R., Mahouraparsad, S. and A. Maurin, (011), Unemploymen Hyseresis in he English-Speaking Caribbean: Evidence from Non-Linear Models, Inernaional Research Journal of Finance and Economics, Issue 78, pp Craigwell, R. and A. Warner (000), Unemploymen in Barbados: , in A. Maurin and P. Wason (Eds.), Empirical Sudies in Caribbean Economy, Technical Papers Vols. 5 and 6, Caribbean Cenre for Moneary Sudies, Trinidad and Tobago, pp Ding, Z., Granger, C. W. J and Engle, R. F. (1993), A Long Memory Propery of Sock Marke Reurns and a New Model. Journal of Empirical Finance 1: Downes, A., Mamingi, N. and R. Anoine (004), Labour Marke Regulaion and Employmen in he Caribbean in J. Heckman and C. Pages (Eds.), Law and Employmen Lessons from Lain America and he Caribbean (Chicago: Universiy of Chicago Press), pp Downes, A. and R. Henry (1994), Labor Marke Issues in Caribbean Moneary Union in T. Farrell and D.Worrell (Eds.), Caribbean Moneary Inegraion (Por of Spain, Caribbean Informaion Sysems and Services Ld), pp Durbin, J., and Wason, G. S. (1971) Tesing For Serial Correlaion in Leas-Squares Regression, III. Biomerika, 58: Engle, R. F. (198). Auoregressive Condiional Heeroskedasiciy wih Esimaes of he Variance of Unied Kingdom Inflaion. Economerica 50:

19 Farrell, T. (1980), The Roo of Unemploymen, Social and Economic Sudies, Vol. 9, No.4, pp Glosen, L.R., Jaganahan, R. and Runkle, D. (1993). On he Relaion Beween he Expeced Value and The Volailiy of he Normal Excess Reurn on Socks. Journal of Finance 48: Hamilon, J. (1989). A New Approach o The Economic Analysis of Non-Saionary Time Series And Business Cycle. Economerica 57, no.. Hoi S, Leon, C. and McAleer, M. (005). Inernaional Tourism Demand and Volailiy Models for he Canary Islands. Unpublished paper, school of economics and commerce, Universiy of Wesern Ausralia. Harewood, J. (1978), Unemploymen and Relaed Problems in he Caribbean, Occasional Papers: Human Resources, No., ISER, Trinidad and Tobago. Heckman, J. and C. Pagés, (004). "Inroducion o "Law and Employmen: Lessons from Lain American and he Caribbean","NBER Chapers, in: Law and Employmen: Lessons from Lain America and he Caribbean, pages Naional Bureau of Economic Research, Inc. Jarque, C. and Bera, A.K. (1980). Efficien Tess for Normaliy, Heeroskedasiciy and Serial Independence of Regression Resuls. Economic Leers 6: Kao, C. and M. Chiang (000). On The Esimaion and Inference of A Co-inegraed Regression in Panel Daa. Advances in Economerics 15: Levin, A., Lin, C. and J. Chu (00). Uni Roo Tess in Panel Daa: Asympoic and Finie-Sample Properies. Journal of Economerics 108 no.1: 1-4. Lm, K., Pesaran, M. and Y. Shin (003). Tesing for Unis Roos in Heerogeneous Panels. Journal of Economerics 115: Maddala, G. and Wu, S. (1999). A Comparaive Sudy of Uni Roo Tess wih Panel Daa and A New Simple Tes. Oxford Bullein of Economics and Saisics 61 s1: Mark, N., Sul, D. (003). Co-inegraion Vecor Esimaion by Panel DOLS and Long-run Money Demand. Oxford Bullein of Economics and Saisics 65, no.5: Michaelowa. K. (004). "Aid Effeciveness Reconsidered - Panel Daa Evidence for he Educaion Secor -,"Discussion Paper Series 6374, Hamburg Insiue of Inernaional Economics. McInyre, A. (1975), Reflecions on he Problem of Unemploymen in he Commonwealh Caribbean in A. Singham (Ed.) The Commonwealh Caribbean ino he Sevenies (Monreal, Cener for Developing Area Sudies, McGill Universiy, pp

20 Nelson, D. (1990). Condiional Heeroskedasiciy in Asse Reurns: A New Approach. Economerica 59: Pedroni, P. (1999). Criical Values for Co-Inegraion Tess in Heerogeneous Panels wih Muliple Regressors. Oxford Bullein of Economics and Saisics 61: Ramsey, J. B. (1969). Tess for Specificaion Errors In Classical Linear Leas Squares Regression Analysis. Journal of Royal Saisical Sociey, Series B 31: Saikkonnen, P. (1991). Asympoically Efficien Esimaion of Co-inegraion Regressions. Economic Theory 7: 1-1. Sock, J. H and Wason, M. W. (1993). A Simple Esimaor of Co-inegraing Vecors in Higher Order Inegraed Sysems. Economerica 61:

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22 Appendix Summary of Labour Papers Tile, Auhor Purpose Findings Mehodology, Daa Caribbean Counry Specific Unemploymen Resuls Labor Marke Regulaion and Employmen in he Caribbean ( Downes e al, 004) Unemploymen in Lain America and he Caribbean. ( Ball and Hofseer, 009) Examining he impac ha labor marke regulaions have on employmen creaion in he English speaking Caribbean Examine long run unemploymen in 19 Lain America and Caribbean counries, moivaed by he desire o provide sysemaic explanaion of variaions across markes and informaive undersanding of he key deerminans Oupu growh is he key facor in generaing employmen in he region, labor marke regulaions had lile saisical significance Unemploymen raes were explained by measures of economic developmen, such as income per capia and educaion as well as he exising percenage of he populaion in rural areas. The resuls confirmed ha shor run changes in unemploymen influenced he naural rae (long run unemploymen) conflicing wih convenional macroeconomic heory. Using a measure of long run unemploymen o es cross secion regressions, Ball and Used Phillips - Lorean Nonlinear Leas squares mehod o deermine long run employmen. Daa covered he period IADB daa and a daa se developed by auhors boh used o explain differences in unemploymen across counries. Two caegories of variables were used o explain long run unemploymen: developmen and labour insiuional variables. Included in developmen are: Per capia GDP and GDP All markes (Barbados, Trinidad and Jamaica) show ha oupu aciviy is he mos significan facor impacing unemploymen. Jamaica experiencing capial fligh fears and a fall in expors during he period he unemploymen raes increase up o 5%. Wih a reurn o poliical sabiliy and expors recovery which produced posiive growh, unemploymen rended downwards o 17% during he periods. Trinidad and Tobago as a resul of lower oil prices experienced a fall in GDP by 8% from 198 o 1989, wih unemploymen rising o over 0% during his period. However his siuaion was reversed when macro Weaknesses Daa limiaions prevened deeper analysis of cyclical rends and impac Obaining consisency of daa measure across counries, some counries unemploymen raes covered a few ciies or a whole naion while ohers covered differen groups wih he definiion of unemploymen varying across naions. The auhors failed o provide a suiable explanaion of unemploymen hyseresis wihin he Lain America and Caribbean region

23 Hofseer uncovered ha cyclical facors per capia growh showed less significance in predicing he naural rae han previously hough (Heckman and Pages, 004) and he only resul ha sands ou as robus and saisically significan is ha counries wih a larger rural populaion have lower unemploymen raes. Explaining his resul Ball and Hofseffer, showed ha imperfec informaion in he labour marke may make fricional unemploymen worse, especially in urban areas where communiies are much larger and he ime o mach he available jobs wih people seeking work is much longer. growh rae Educaion measure consising of educaional aainmen of he oal populaion aged 5 and over. Value added of he agriculural secor as a proporion of GDP Rural populaion as a % of oal populaion Labour Insiuional variables: Two alernaive sources, he indexes developed by Heckman and Pages (HP) and Ball and Hofsellar. The HP indexes includes he Advance Noice, Indemniy for Dismissal, Senioriy Paymens and he Social Securiy Conribuion, while he Ball and Hofseller indexes are Rigidiy of Employmen, Non-Wage Coss, Firing Coss and Labor Tax condiions shifed; oil prices recovered and he currency was devalued. 3

24 Caribbean Labour Markes and he Grea Recession (Archibald e al, 011) Provide an empirical assessmen of demand driven shocks on regional labour markes The paper using an economeric model of Caribbean labour markes, sugges ha while employmen in he region ends o be relaively sicky downwards, shocks o he global economy can sill have large effecs on employmen in he region. The paper esimaes ha for every year he global economy spends in recession, employmen in he region falls by approximaely 65k persons. These negaive adverse effecs on employmen also end o be quie persisen, paricularly for females. The sudy provides a deailed assessmen of he effecs of he curren recession on regional labour markes. The assessmen idenifies he main crisis impacs as rising unemploymen and underemploymen, as well as hreas o job securiy. I furher indicaes ha he fallou has generally been severe on ourism dependen economies and has disproporionaely affeced vulnerable groups paricularly he youh Using an unbalanced panel model he sudy presens an economeric model of he Caribbean labour marke in order o invesigae he long run impac of exernal shocks on regional employmen. The sample of counries employed includes Anigua and Barbuda, The Bahamas, Barbados, Belize, The Cayman Islands, Dominica, Grenada, Guyana, Jamaica, Sain Lucia, Suriname and Trinidad and Tobago for he period 1970 o 008. Overall he employmen impacs of he recession have been severe and have exacerbaed already high levels of unemploymen in he region. These adverse impacs have also mirrored he cross counry differenial impacs on oupu, affecing he more ourism and expor manufacuring dependen erriories worse han he commodiy exporers. Indeed, Guyana and Haii regisered negligible labour marke impacs from he recession, while in Belize he iniial shock o he labour marke was significan, bu quickly began o dissipae, and Trinidad and Tobago appears o be experiencing negaive labour marke impacs wih a lag. Meanwhile, severe labour marke dislocaion has been observed in key ourism desinaion like he Bahamas, Barbados, Grenada, Jamaica, Sain Kis and Nevis and Sain Lucia. The focus on he employmen impacs of he recession which limis he range of policy recommendaions. More in-deph analysis of oher differenials relaed o socioeconomic saus or educaional aainmen would be of grea ineres o academics, policymakers and he public. 4

25 Unemploymen Hyseresis in he English Speaking Caribbean: Evidence from Non- Linear Models (Craigwell e al, 011) Using nonlinear models he aricle provides an empirical examinaion of he hypohesis of hyseresis and also reviews he phenomenon of high and persisen unemploymen in he economies of he Caribbean The resuls confirmed he hypohesis of hyseresis wih he shocks o he level of unemploymen having a lasing effec in heir developmens. To reproduce he asymmery and persisence characerizing unemploymen daa, he nonlinear STAR models were more appropriae han he linear AR models. Using nonlinear models he quarerly unemploymen series pos 1970 were sudied for he economies of Barbados and Trinidad For Barbados he LSTAR model which allows for asymmeric deviaions of unemploymen from is equilibrium level is preferred while in he case of Trinidad an ESTAR specificaion which reproduces a dynamic series of differenial unemploymen rae around a sysem of posiive growh and a regime of negaive growh is seleced Fuller comparison of he regime swiching models could have been compleed o beer verify he dynamics of he unemploymen rae and he speed a which i moves from one sae o anoher. 5