Hysteresis in Unemployment: Evidence from Latin America

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1 Porland Sae Unversy PDXScholar Economcs Faculy Publcaons and Presenaons Economcs Hyseress n Unemploymen: Evdence from Lan Amerca Maas Mednk Columba Unversy Cesar Rodrguez Porland Sae Unversy, cesar.rodrguez@pdx.edu Inder J. Ruprah Iner-Amercan Developmen Bank Le us know how access o hs documen benefs you. Follow hs and addonal works a: hps://pdxscholar.lbrary.pdx.edu/econ_fac Par of he Inernaonal Economcs Commons Caon Deals Mednk, M., Rodrguez, C.M., & Ruprah, I.J. (2008). Hyseress n unemploymen: evdence from Lan Amerca. Workng Paper: OVE/WP-04/08. Iner-Amercan Developmen Bank Ths Workng Paper s brough o you for free and open access. I has been acceped for ncluson n Economcs Faculy Publcaons and Presenaons by an auhorzed admnsraor of PDXScholar. For more nformaon, please conac pdxscholar@pdx.edu.

2 Hyseress n Unemploymen: Evdence from Lan Amerca Maas Mednk, Cesar M. Rodrguez and Inder J. Ruprah Iner-Amercan Developmen Bank Offce of Evaluaon and Oversgh Workng Paper: OVE/WP-04/08 March, 2008

3 Elecronc verson: Iner-Amercan Developmen Bank Washngon, D.C. Offce of Evaluaon and Oversgh, OVE Hyseress n Unemploymen: Evdence from Lan Amerca Maas Mednk, Cesar M. Rodrguez and Inder J. Ruprah* *Maas Mednk, Columba Unversy - School of Inernaonal and Publc Affars, New York, NY., US. Emal: mm3066@columba.edu; Cesar M. Rodrguez, Offce of Evaluaon and Oversgh of he Iner-Amercan Developmen Bank; Washngon, DC., US. Emal: cesarr@adb.org; Inder J. Ruprah, Offce of Evaluaon and Oversgh of he Iner-Amercan Developmen Bank. Washngon, DC. Emal: nderr@adb.org. The fndngs and nerpreaons of he auhors do no necessarly represen he vews of he Iner-Amercan Developmen Bank. The usual dsclamer apples. Correspondence o: Inder Ruprah, e-mal: nderr@adb.org, Offce of Evaluaon and Oversgh, Iner- Amercan Developmen Bank, Sop B-760, 300 New York Avenue, NW, Washngon, D.C

4 ABSTRACT Ths paper ess he hyseress hypohess n unemploymen for 3 Lan Amercan counres coverng he perod The ess explo he me seres and he cross seconal varaon of he seres, and allows for cross secon dependence and a dfferen number of endogenously deermned srucural breakpons. The fndngs gve suppor o he hyserc dynamc hypohess for he majory of he counres analyzed. The mplcaons of he resuls have ramfcaons regardng macro-sablzaon, srucural reform, and he desgn of socal safey proecon. Keywords: Unemploymen hyseress, un roo es, panel un roo es, crosssecon dependence. JEL Classfcaon: C22, C23, E24, J24, J60

5 INTRODUCTION Crcal feaures of Lan Amerca's economc growh are s hgher volaly, greaer frequency of crss, and shorer perods of booms han oher regons n he world. These feaures of economc growh rase he queson of he characerscs of he regon's unemploymen dynamcs. From a heorecal pon of vew, here exs wo exreme vewpons for undersandng he busness cycle-unemploymen dynamcs 2. The frs one, he naural rae of unemploymen, s ha oupu flucuaons generae cyclcal movemens n he unemploymen raes 3. Ths vew, characerzes unemploymen as a mean reverson process whch means ha despe cyclcal movemens, unemploymen ends o rever o s equlbrum n he long run. The second one, he "hyseress" hypohess, s ha cyclcal flucuaon wll have permanen effecs on he level of unemploymen and herefore, he level of unemploymen can be characerzed as a non-saonary process 4. In beween he wo exreme vewpons s he perssence hypohess. The laer mples a slow speed of adjusmen oward long run equlbrum level and hence; s a specal case of he naural rae of unemploymen hypohess snce he seres show (slow) mean reverson. The mmedae polcy mplcaon s ha here s no permanen effec bu raher a emporary one. Esablshng whch characerzaon s emprcally relevan for Lan Amercan counres s mporan for a number of reasons. Frs, because has ramfcaons for macroeconomc sablzaon polces, srucural reforms -such as labor marke reforms- and he desgn of socal proecon neworks. If hyseress s he approprae represenaon hen unemploymen could be a long lasng problem afer sablzaon or a reform. Furher, f labor reforms are carred ou durng rsng unemploymen and he unemploymen process s a hyserc one hen he expeced posve effec of reforms could be choked of because of a me conssency problem. However, deal mng from a hyserc characerzaon of unemploymen namely durng fallng unemploymen conflcs wh he mng recommendaons of he polcal economy's new orhodoxy ha concludes ha crss s necessary for a reform as makes he polcs of reform polcy more feasble 5. Second, s of parcular neres for Lan Amerca as s a regon ha has been h by crses ha can be nerpreed as relavely large number of See Berg e al. (2006). 2 See Karanassou e al. (2007) for a revew. 3 See Layard e al. (99) for a dealed descrpon. 4 See Cross (995) for hyseress n unemploymen and Göke (2002) for a revew of he use of hyseress concep n economcs. 5 For a revew of he leraure see Drazen (2000) and Alesna e al. (2006).

6 shocks. Thrd, here s an exensve leraure on hs ssue for OECD counres and he begnnng of emprcal work on Transonal Economes 6. The leraure generally suppors he hyseress hypohess bu once conrolled for srucural change he evdence s less clear-cu. However, as far as we know, here has no been a sysemac research o delm he acual unemploymen dynamcs n Lan Amerca wh regard o he wo compeng hypohess of he naural rae and hyseress. Convenonally he emprcal leraure aemped o deermne he exsence of hyseress hrough un roo ess of a gven counry's unemploymen seres. The laer exercse, he lnear hyserc hypohess, s an exreme case of a more general hyseress case. As Cross e al. (998) poned ou he wo defnng feaures of a general hyserc process are remanence and selecve memory of pas shocks. Remanence mples ha wo shocks of equal sze bu n oppose drecons do no cancel each oher and selecve memory refers o he phenomena where only he non- domnaed exremum values of he shocks are reaned of selecve memory where all he shocks are recorded n he memory of he seres. The lnear hyserc hypohess, n conras, does no have domnaed exremum values and wo consecuve shocks of equal magnude and oppose drecon wll cancel each oher. However, as Leon-Ledesma e al. (2002) pon ou, hyseress nerpreed as a un roo s no necessarly a rue descrpon of he unemploymen daa generang process bu can be used as a local approxmaon o he phenomena durng he sample perod. Thus he sascal ess provde an upper bound of he hyseress hypohess. Furher, he leraure on un roo and saonary self has undergone a huge advance. These advances overcome a number of problems wh he radonal approach of esng for un roos. Frs, as argued by Ba and Ng (200), convenonal un roo ess have low power agans he saonary alernave when he process s near negraed. In hs case he evdence n favor of hyseress would be sronger f smulaneously o he es for he null of a un roo s carred ou wh he reversal complemen of he null of saonary. Second, convenonal un roo es end o have low power n he presence of srucural breaks. In general, he presence of srucural breaks mgh lead o erroneously accepng he hypohess of un roo. Thrd, he power of he convenonal ess could also be low due o a small sample. The proposed soluon o hese wo laer problems n he recen leraure s o explo he me seres and cross secon vrues of panel daa and o es smulaneously for he nulls of un roo and saonary and srucural sably. The baery of ess used 6 See Sanely (2005) for a mea-regresson analyss revew and León-Ledesma (2003). 2

7 n hs paper suggess ha he unemploymen process s a hyserc one for mos of he Lan Amercan counres suded. The paper proceeds as follows. The nex secon descrbes he sylzed facs of unemploymen n Lan Amerca. In he hrd secon, he emprcal sraegy s developed. Fnally he fourh secon concludes. THE STYLIZED FACTS For heursc reasons we can vew unemploymen over he oupu boom- bus cycle. An addonal reason s ha ofen back of he envelope calculaons of he unemploymen coss of growh flucuaons use he Okun's Law's coeffcen ha relaes unemploymen o oupu growh (see Lang and De Pere (2006) for OECD counres). Okun's Law mplcly assumes he naural rae hypohess. The bus-boom cycle s deermned by he mehod recommended by Hardng and Pagan (2006). From he ndvdual counry's real GDP and unemploymen seres are denfed for each seres separaely he followng sequence of urnng pons: peak, rough, and recovery and so on. Once hese pons are denfed s calculaed he duraon of he cycle (number of perods from peak o rough (he recesson phase) plus from rough o he nex peak (he expansonary phase). A second calculaon s he deph of he cycle.e. he maxmum drop of oupu from peak or he maxmum rse n unemploymen from a rough. These auhors also sugges he concordance ndex o judge colneary of busness cycles across counres. The ndex n able suggess hgh concordance ha could be arbued o common exernal shocks. Table. Concordance Index for Unemploymen Raes Argenna Brazl Chle Colomba Cosa Rca Ecuador Mexco Ncaragua Panama Paraguay Peru Uruguay Argenna.000 Brazl 0.248*.000 Chle * Colomba 0.439* 0.65* Cosa Rca * 0.69* Ecuador 0.362* 0.89* * Mexco * * Ncaragua 0.627* * * 0.30* Panama * * * 0.69*.000 Paraguay 0.44* 0.635* * Peru 0.25* 0.305* * * * *.000 Uruguay 0.442* 0.24* * * 0.042* * 0.209*.000 Venezuela 0.59* 0.276* * * * 0.29* 0.798* Noe: sgnfcan coeffcens (a 5% sgnfcance level) are denoed by a * The evoluon of unemploymen n each Lan Amercan counry s presened n Fgure. Moreover, he calculaons we jus dscussed are presened n Table 2. They show ha he duraon of oupu from peak o recovery s on average abou 3

8 3 years whle he duraon of unemploymen s double, 6 years. On recovery of pre-crss unemploymen raes oupu was 3% hgher n ha year relave o he prevous low of unemploymen raes. The average deph s 6.4% for oupu and 3.7% for unemploymen. Fgure : Unemploymen Raes n Lan Amercan n % 4

9 Counry/Perod Num of years o recover GDP Table 2: Crss Epsodes: GDP and Unemploymen ΔUnemploymen a he recovery pon Unemploymen Deph GDP Deph Num of years o recover pre-crss level of unemploymen ΔGDP by he unemploymen recovery Arg_87/ No Ye NA Arg_94/ Arg_98/ Bar_ Bra_ No Ye NA Ch_ No Ye N/A Col_ Ecu_ Mex_ Mex_ No Ye N/A Nc_ Pan No Ye N/A Par_ No Ye N/A Per_87/ No Ye N/A Per-97/ Uru_ No Ye N/A Uru_ No Ye N/A Ven_ Ven_ No Ye N/A AVERAGE Noe: 22 crss epsodes are consdered; Δ denoed a changed n he varable However, for some crss, unemploymen raes have sll no fallen o pre-crss levels alhough oupu has recovered. Ths holds for en crses n egh counres. For four counres' crss epsodes (Argenna , Peru , Uruguay , and Venezuela ) unemploymen was h wh a subsequen crss bu for fve counres despe no subsequen crss (Brazl , Brazl , Mexco , Panama 986-9, Paraguay 998-9) unemploymen has no fallen o pre-crss levels despe oupu recoverng s pre-crss levels. The descrpve daa calculaons reveal ha Okun's coeffcen suffers change over he cycle wh jobless growh durng he upurn n economc acvy. Furher, also suggess ha a quck reversal o he mean of unemploymen does no generally hold, hs n urn suggess ha unemploymen may be eher a slow mean reverson or a hyserc process. 5

10 EMPIRICAL STRATEGY. Daa Descrpon The unemploymen rae daa s from he naonal sascal nsues of each counry consdered n hs paper. Only a few counres have quarerly daa and mos of hem only from md nnees. Thus, o maxmze he me perod and he number of counres covered, we use annual daa from for Argenna, Brazl, Chle, Colomba, Cosa Rca, Ecuador, Mexco, Ncaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. 2- Theorecal Jusfcaon Before dealng he varous ess and her resuls s useful o slghly formalze he ssue under he lnear hyserc hypohess. Consder ha unemploymen, y, follows an AR () process as: y = α + ρy + ε () 2 where ε s d( o, ). σ ε Then f under he naural rae hypohess, H 0 : ρ < holds hen he naural-mean-equlbrum rae o whch unemploymen revers o s α y = ρ. Under he hyseress hypohess, he un roo es has as he null H 0 : ρ = wh he one sded alernave of H : ρ <. The complemenary saonary es has as he null H 0 : ρ < wh he alernave H : ρ =. If he former s no rejeced and he laer s rejeced hen one can asser ha he unemploymen follows a hyserc process. 3- Tme Seres Tess Lnearly hyserc behavor of unemploymen hypohess s carred ou separaely for a sample of 3 ndvdual counry's annual unemploymen seres from 980 o The ess used were he Augmened Dckey-Fuller (ADF) wh he null of a un roo and he Kwakowsk, Phllps, Schmd and Shn (KPSS) Langrage Mulpler es for he null of saonary. Regardng he ADF es, one of he key ssues n hs procedure s he number of lags o nclude n he auxlary regresson. The crcal values assocaed wh he ADF es were generaed n he absence of seral auocorrelaon n he error erm. Hence, he es requres a suffcen number of lag erms of he dependen varable such ha he error erm s whe nose. However, when more lag erms are nroduced, he power of he 6

11 es falls. Ths mples ha he choce of he number of lags s a key elemen when usng ADF ess. I s sandard n he leraure o use he Akake nformaon crera (AIC) and Schwarz nformaon crera (BIC) o selec he number of lags. For he ADF es, hree possble models are consdered: y = ρa y + u, y = μb + ρb y + u, y = μc + γ c + ρc y + u where he null hypohess s ha ρ = for = a, b, c. Table 3: ADF Resuls Argenna Crcal Values Concluson Ncaragua Crcal Values Concluson % 5% 0% % 5% 0% Do no rejec Do no rejec m Do no rejec m Rejec Do no rejec Do no rejec Lags (BIC) Lags (BIC) 0 Brazl Crcal Values Concluson Panama Crcal Values Concluson % 5% 0% % 5% 0% Do no rejec Do no rejec m Do no rejec m Do no rejec Do no rejec Do no rejec Lags (BIC) 0 Lags (BIC) 0 Chle Crcal Values Concluson Paraguay Crcal Values Concluson % 5% 0% % 5% 0% Rejec Rejec m Do no rejec m Rejec Do no rejec Do no rejec Lags (BIC) 0 Lags (BIC) 0 Colomba Crcal Values Concluson Peru Crcal Values Concluson % 5% 0% % 5% 0% Do no rejec Do no rejec m Do no rejec m Do no rejec Do no rejec Rejec Lags (BIC) 0 Lags (BIC) 9 Cosa Rca Crcal Values Concluson Uruguay Crcal Values Concluson % 5% 0% % 5% 0% Do no rejec Do no rejec m Do no rejec m Do no rejec Do no rejec Do no rejec Lags (BIC) 9 Lags (BIC) 0 Ecuador Crcal Values Concluson Venezuela Crcal Values Concluson % 5% 0% % 5% 0% Do no rejec Rejec m Do no rejec m Do no rejec Do no rejec Rejec Lags (BIC) 8 Lags (BIC) 0 Mexco Crcal Values Concluson MacKnnon (99) crcal values % 5% 0% Noes: Do no rejec : model wh a rend and a consan erm m Rejec m : model wh a consan erm Do no rejec : model wh no consan and no rend Lags (BIC) 3 7

12 Table 3 above summarzes he es sascs for he hree models. Despe he heerogeney of GDP and unemploymen experences across dfferen crses n he same counry and across counres, he resuls of he ADF are ha for almos all he counres -wh he excepons of Paraguay and Venezuela- he un roo null hypohess canno be rejeced. These resuls, based on an unvarae analyss of unemploymen, suppor he hypohess of a hyserc behavor n unemploymen. Table 4. KPSS Resuls Num. of lags Sasc Concluson Argenna Rejec Brazl Rejec Chle Rejec Colomba Rejec Cosa Rca Do no rejec Ecuador Rejec Mexco Do no rejec Ncaragua Rejec Panama Do no rejec Paraguay Rejec Peru Rejec Uruguay Do no rejec Venezuela Rejec Crcal Values % 5% 0% Noes:. The auocovarance funcon was weghed by he quadrac specral kernel raher han he Barle kernel. 2. The auomac bandwdh selecon procedure proposed by Newey and Wes (994) as descrbed by Hobjn e al. (998) s used o deermne he number of lags used. Table 4 above presens he resuls of he KPSS es usng he opmal bandwdh selecon procedure o deermne he number of lags. The KPSS es assumes ha he seres y s rend saonary under he null. The KPSS sasc s based on he resduals from he OLS regresson of y on he exogenous varables x : y = x δ + u (2) The LM sasc s hen defned as 2 S( ) LM = 2 T f0 where, f 0 s an esmaor of he resdual specrum a frequency zero and where S() s a cumulave resdual funcon 8

13 S( ) = r= ) ur ) based on he resduals u = y x ) δ (0). The KPSS es pons n he same drecon as he ADF es: for almos all he counres he hypohess of saonary s rejeced. In oher words, hyseress, as evdenced by he ADF and he KPSS ess, seems a plausble hypohess o descrbe he unemploymen dynamcs of Lan Amercan counres. Sll, he cavea here s ha he ess' fndngs mgh be affeced by he low power of he ess due o he small sample used and he non-esed hypohess of possble srucural breaks. To overcome hese problems we urn o panel daa echnques ha overcome he small sample problem by explong boh cross- seconal and me-seres dmensons of he daa, and by usng echnques ha es for srucural breaks. 4- Panel Daa Tess To es for he null of a un roo wh panel daa we use he Im, Pesaran and Shn (2003) (IPS) es. Ths es s essenally a panel daa equvalen of he ADF sngle seres es. Noe ha he es s desgned for a heerogeneous panel n whch each cross-secon s esmaed separaely and no pooled. Furher, he process does no mpose he same speed of mean reverson n he dfferen counres hus allows for heerogeney across counres. In addon, o ake no accoun ha dfferen cross-secons are no dsrbued ndependenly, we also repor he demeaned verson of he es;.e. we subrac cross secon averages from he ndvdual counry's seres. The IPS es s based on he followng regresson equaon: Δy = α d + δ y + γ Δy + ε m m p k k (3) k = wh =, K, T, =, K, N, where dm denoes he deermnsc componen. The null hypohess s gven by H 0 : δ = 0; =, K, N whereas he alernave hypohess s H : δ < 0 =, K, N ; δ = 0 = N +, K, N Therefore; he null s rejeced f here s a subse N of saonary ndvduals. As a resul, he un roo hypohess esng can be conduced allowng for a hgher degree of heerogeney provded ha under he alernave hypohess s no requred a common auoregressve parameer. The es sasc used by IPS s he sandardzed group-mean bar es sasc - he Ψ es: 9

14 Ψ = N [ N E( )] N N N = = Var( ) (4) where denoes he ndvdual pseudo -rao for esng 0 δ = n (3). Ths es assumes cross-seconal ndependence among panel uns, bu allow for heerogeney of he form of ndvdual deermnsc effecs (consan and/or lnear me rend) and heerogeneous seral correlaon srucure of he error erms. Snce he null hypohess of hs es assumes ha all he seres consdered are non saonary, makng very sensve o he margnal addon of subracon of counres. Inally, we conduced he es for he 3 Lan Amercan counres where daa was avalable for he complee perod We also consdered a sub sample of 7 counres. The resuls are summarzed n Annex. Table 5. IPS Resuls Observaons Lags Trend Demeaned -bar cv 0% cv 5% cv % W[-bar] P-value Concluson All counres No Yes Rejec Bg No Yes Do no rejec All counres 32 No Yes Rejec Bg 7 70 No Yes Rejec All counres No Yes Rejec Bg No Yes Rejec All counres No No Rejec Bg No No Do no rejec All counres 32 No No Rejec Bg 7 70 No No Do no rejec All counres No No Rejec Bg No No Rejec All counres Yes Yes Do no rejec Bg Yes Yes Do no rejec All counres 32 Yes Yes Rejec Bg 7 70 Yes Yes Rejec All counres Yes Yes Do no rejec Bg Yes Yes Do no rejec All counres Yes No Do no rejec Bg Yes No Do no rejec All counres 32 Yes No Rejec Bg 7 70 Yes No Do no rejec All counres Yes No Do no rejec Bg Yes No Do no rejec Noe: Bg 7 = Argenna, Brazl, Chle, Colomba, Mexco, Peru and Uruguay 0

15 When consderng boh he demeaned and non-demeaned versons wh no rend, he null hypohess s rejeced for boh samples whle nroducng a rend he un roo hypohess canno be rejeced. The laer case, hs s gvng evdence of a poenal hyserc behavor of unemploymen. Sll, he small sample and he cross secon ndependence hypohess may be an ssue n he performance of hs es. As shown by several auhors (ncludng O'Connell, 998, Banerjee, Marcellno, and Osba, 2004a, 2004b), he assumpon of cross-seconal ndependence on whch he asympoc resuls of he IPS's procedure reles (as acually mos panel daa un roo ess of "he frs generaon" ncludng Maddala, and Wu, 999; Levn, Ln and Chu 993, 2002,) s ofen unrealsc and can be a odds wh economc heory and emprcal resuls. Besdes, as shown n wo smulaon sudes by Banerjee e al. (2004a, 2004b) f panel members are cross-correlaed, all hese ess experence srong sze dsorons and lmed power. Ths s analycally confrmed by Lyhagen (2000) and Pedron and Urban (200). For hs reason, panel un roo ess relaxng he assumpon of cross seconal ndependence have recenly been proposed n he leraure by Cho (2002), Ba and Ng (2003), Moon and Perron (2003), Pesaran (2003) and Phllps and Sul (2003). We decded o nvesgae he presence of a un-roo usng he ess proposed by Cho (2002) and Pesaran (2003). Cho (2002) uses an errorcomponen model o handle cross seconal dependence. In parcular, o le cross-secons uns respond homogeneously o a sngle common facor f he model s: z z 0 = α + = ρ z f + z + ε 0 0 The frs sep s o oban a cross-seconally ndependen seres. For ha purpose Cho (2002) frs demeans he daa by GLS and hen akes cross-seconal means μ 0 0 o oban a new varable z z z whch s ndependen n he crossseconal dmenson as boh n and T goes o nfny. Fnally Cho (2002) combnes p-values from ndvdual ADF ess usng hree sascs:

16 P m Z = = n n [ ln( p ) + ] n = n = Φ ( p ) n * p L = ln 2 π n / 3 = p where Φ s he cdf for a sandard normal varable. All of hese hree sascs have a sandard normal dsrbuon as n and T. As a general rule, he es based on he P m sasc rejecs he null hypohess for large posve values of he sasc, whle he oher wo ess rejec for large negave values of he sasc. Table 6 shows he resuls for he Cho (2002) es. The evdence found sugges ha when consderng cross secon ndependence he null hypohess of un roo s rejeced, bu once we allow for cross secon correlaon he concluson s reversed and we canno rejec he hypohess of nonsaonary. Hence, he evdence suppors he hyseress hypohess. Table 6. Cho (200) and Cho(2002) Panel Un Roo Tes Cross-seconal dependence Unemploymen Concluson Z (nverse normal) Do no rejec Pm (modfed nverse ch-square) 3.22 Rejec L* (modfed log) Do no rejec No cross-seconal dependence Unemploymen Concluson Z (nverse normal) Rejec Pm (modfed nverse ch-square).06 Rejec L* (modfed log) -.42 Rejec T 26 N 3 Noes:. Annual daa for he samplng perod were used. 2. The Dckey--Fuller-GLS es coupled wh BIC lag selecon was used as and underlyng un roo es for me seres. 3. (*): sgnfcan a he 5% level. 4. The Pm es s a modfcaon of Fsher s (932) nverse ch-square ess and rejecs he null hypohess of un roo for posve large values of he sascs. 5. The L* s a log es. 6. The ess Z and L* rejec he null for large negave values of he sascs. 7. The P, Z and L* ess converge under he null o a sandard normal dsrbuon as (N,T g ). Pesaran (2003) provdes an exenson of he Im, Pesaran and Shn (2003) es o allow for one saonary facor wh heerogeneous loadngs. Ths las es n 2

17 parcular, seems o show "good sze and power for dfferen values of n and T and model specfcaons". In parcular, o accoun for he possble small sample bas from he Cho (2002) es, we perform he Pesaran (2003) es whch seems o have a beer performance n small samples. Moreover Pesaran (2003) propose a smple alernave es where he sandard ADF regressons are augmened wh he cross secon averages of lagged levels and frs-dfferences of he ndvdual seres and shows ha he cross seconally augmened panel un roo ess have sasfacory sze and power even for relavely small values of n and T. Ths s parcularly rue of cross seconally augmened and runcaed versons of he smple average -es of Im, Pesaran and Shn (2003) and Cho's (2002) nverse normal combnaon es. The lmng dsrbuon of hs es s non-sandard and ables wh crcal values are gven n Pesaran (2003). The es s gven by n CIPS( n, T ) = ( n, T ) n = where CIPS s he cross-seconally Augmened IPS and ( n, T ) s he crossseconally augmened Dckey-Fuller sasc for he cross secon un. Table 7 presens he resuls. In mos cases we now canno rejec he null hypohess of nonsaonary and hence ake hs as evdence of he presence of a un roo process n he panel srucure. h 3

18 Table 7. Pesaran Resuls Observaons Lags Trend Demeaned -bar cv 0% cv 5% cv % W[-bar] P-value Concluson All counres No Yes Rejec Bg No Yes Do no rejec All counres 32 No Yes Rejec Bg 7 68 No Yes Rejec All counres No Yes Do no rejec Bg No Yes Rejec All counres No No Rejec Bg No No Do no rejec All counres 32 No No Rejec Bg 7 68 No No Rejec All counres No No Do no rejec Bg No No Rejec All counres Yes Yes Do no rejec Bg Yes Yes Do no rejec All counres 32 Yes Yes Rejec Bg 7 68 Yes Yes Rejec All counres Yes Yes Do no rejec Bg Yes Yes Rejec All counres Yes No Do no rejec Bg Yes No Do no rejec All counres 32 Yes No Rejec Bg 7 68 Yes No Rejec All counres Yes No Do no rejec Bg Yes No Rejec Noe: Bg 7 = Argenna, Brazl, Chle, Colomba, Mexco, Peru and Uruguay Based on Pesaran (2003) Fnally, o accoun for he possbly of srucural breaks we apply he Carron-- Slvesre e al. (2005) es. Ths s a null saonary es a la KPSS exended o panel daa by Hard (2000) and furher exended by Carron e al. (2005) o smulaneously consder he possbly of srucural breaks. The es allows for heerogeney and mulple srucural breaks a dfferen unknown daes and dfferen number of breaks for each counry ha are deermned endogenously. The basc seup of he es s as follows. Le y be a sochasc process such ha: y = α + β + ε (5) m m = θ k DTbk + γ k DU k + α k = k = 2 v d( o, σ v ) and 0 α + v (6) where =, K, n ndvduals and =, K,T me perods. The dummy varables are defned as { } α s a consan wh { } 4

19 DT and DU bk k = Tbk + = 0 elsewhere > Tbk = 0 elsewhere h where T bk denoes he k dae of he break for he ndvdual wh k = {, K, m}. Hence he daa generang process gven by (5) and (6) can be defned under he null hypohess of saonary as y m m = α + θk DTk + β + γ k DU k + α + ε (7) k= k= where { } ε s a sequence of mxngales 7 and Tbk > Tbk DTk = 0 elsewhere Fnally, he es s formulaed as n Hard (2000), ha s, as he average of he ndvdual KPSS sasc. The general expresson akes he form: n T LM ( λ ) = ω T S (8) n = = where = ) ε denoes he paral sum process obaned from he OLS S j= resdual of (7) and j ) 2 ) W = n 2 W j= where 2 W ) h s a conssen esmae of he long-run varance of ε. The parameer λ from equaon (8) denoes he dependence of he es on he daes of he break. In parcular, ( ), K, λ = ( λ = λ m T T,K, Tbm / T ) b / denoes he relave posons of he daes of he breaks on he me perod T. Fnally, he normalzed es sasc converges o a sandard normal dsrbuon. } v } 7 Acually, {ε and { are muually ndependen across he wo dmensons of he panel. 5

20 Table 8: Unemploymen rae panel daa se Panel A: Esmaon of he number of srucural breaks Indv. es Num.of Break daes * breaks Argenna ; 992 Brazl ; 990; 997; 200 Chle Colomba Cosa Rca ; 994 Ecuador ; 986; 995 Mexco ; 987 Ncaragua ; 985; 988; 990 Panama ; 987; 99 Paraguay ; 998 Peru Uruguay Venezuela ; 995 Panel B: Saonary panel daa ess Tes P-value Concluson Homogeneous Rejec Heerogenous Rejec Boosrap dsrbuon (allowng for cross-secon dependence).0% 2.5% 5.0% 0.0% 90.0% 95.0% 97.5% 99.0% Homogeneous Heerogenous Noe: * Only n he cases of Cosa Rca and Panama he null hypohess s no rejeced usng a % crcal n he oher cases s a a 5% and a 0%. Allowng for 5 srucural breaks To compue he es we allow for up o 5 breaks, m max = 5, where he number of breaks has been seleced usng he sequenal procedure n Ba and Perron (998). Ths procedure consss of specfyng a maxmum number of breaks max max ( m ), esmang her poson for each m m, = {, K, n}, esng for he sgnfcance of he breaks and, hen, obanng her opmum number and poson for each seres 8. Table 8 above presens he resuls. Panel A n he able offers he ndvdual nformaon, he number of breaks and her poson. In general, a leas one srucural break was deeced by he sequenal procedure n all he counres consdered. If we now combne he 8 Carron--Slvesre e al. (2005) sugges esmang he daes of he breaks choosng he argumen ha mnmzes he sequence of ndvdual SSR. In parcular, frs he daes for possble breaks are esmaed and hen he number of opmal srucural breaks s seleced for each. The selecon creron used s he modfed Schwarz nformaon creron (LWZ) of Lu, Wu and Zdek (997) suggesed by Ba and Perron (2003) snce he model ncludes rendng regressors. 6

21 ndvdual nformaon o compue he es sasc n Panel B, we realze ha he null hypohess of saonary s rejeced boh for he homogeneous and he heerogeneous long-run varance. However, hs concluson s reversed when cross-secon dependence s aken no accoun. In parcular, he crcal values drawn from he boosrap dsrbuon ndcae ha he null hypohess canno be rejeced a he 5% level. From hs es, he evdence pons o he absence of hyseress n unemploymen. However, we need o nerpre hs resul wh cauon snce we have a small sample ha s affecng he boosrap dsrbuon and hence may be basng he concluson. To overcome hs problem, more daa pons should be consdered; an opon no avalable a hs me. Hence, a nonesable hypohess s ha he resuls are sensve o longer me seres and or hgher frequency daa bu neher s avalable for he majory of he counres suded n hs paper. CONCLUDING REMARKS In hs paper we underook a sysemac emprcal analyss of he dynamc behavor of unemploymen n Lan Amercan counres. Specfcally, we appled a baery of sascal ess on sngle and panel daa seres o deermne f here were hyserc feaures n Lan Amerca's labor markes. We found, from boh un roo and saonary es approaches, ha for mos Lan Amercan counres her aggregae unemploymen can bes be descrbed as a hyserc dynamc. The confdence aached o hs asseron s hghes for Lan Amerca's seven larges economes. The degree ha he hyserec feaure of labor markes s due o, ndvdually or her neracon, labor marke nflexbly, pro-cyclcal moneary and fscal polcy or decreasng capal sock s beyond he scope of hs paper. However, a research agenda focusng exclusvely on labor marke nflexbly (due o mnmum wages, unons, and employmen proecon) may be msplaced as labor proecon polces are eher weak or generally no fully enforced. Meanwhle here s growng evdence ha moneary and fscal polcy s pro-cyclcal and, alhough o a lesser exen, ha pro-marke srucural reform has no resuled n an ncrease n prvae nvesmen over and above he declne n publc nvesmen; suggesng he possbly of a declne n capal sock. The why of hyseress s a opc for a subsequen sudy. The why of hyseress, a opc for a subsequen sudy, s mporan for drawng ou he polcy ramfcaons of he fndngs; ha s, wheher labor marke reform or macroeconomc polcy should be used for smoohng as requred. 7

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