Empirical Evidence on the US Labour Market Hysteresis: New Keynesian Wage Phillips Curve (1990-2014)

This study investigates the concept of hysteresis for the US economy vs natural rate hypothesis during (1990:Q1-2014:Q4). Mainstream economics accepts the natural rate in the long run vs high and persistent unemployment idea of hysteresis. Unit root tests detect the nonstationarity of (un)employment series which may indicate hysteresis. Next, macroeconomic background is presented, and human capital or insider-outsider approaches are explained. With the (NKWPC) model, wage inflation is estimated with (un)employment variables and further with the output gap and growth of excess demand. Results reveal no hysteresis patterns except with the rate of change (ROC) of output during 2001 recession. Demand shocks or labour market factors may be causing nonstationarity of (un)employment according to which economic policy choice should be made regarding: demand management policies vs. labour market measures