The Dynamics of Unemployment in Poland from 1992 to 2017

Gospodarka narodowa www.gospodarkanarodowa.sgh.waw.pl p-ISSN: 0867-0005 e-ISSN: 2300-5238 1(297)/2019, 135–149 DOI: 10.33119/GN/105519 Andrzej PISULEWSKI* The Dynamics of Unemployment in Poland from 1992 to 20171 Abstract: This article examines two approaches to the dynamics of unemployment in Poland. The first approach is based on the theory of a natural rate of unemployment. Under this theory, the economy can depart from the natural rate of unemployment in the short term due to nominal shocks, but in the long term the economy is expected to achieve an equilibrium indicated by the natural rate of unemployment. The second approach to the dynamics of unemployment is the so-called hysteresis of unemployment theory. According to this theory, all shocks to unemployment will have a permanent effect on the natural rate of unemployment. Testing these two theories amounts to testing stationarity of the series. If the unemployment rate is a non-stationary series with a unit root, then the hysteresis-in-unemployment hypothesis has to be accepted. On the other hand, if the unemployment rate is a stationary series then the hysteresis hypothesis is rejected in favour of the natural rate theory. In the study, the rate of unemployment in Poland is analysed in the period from 1992 (Q2) to 2017 (Q4). Threshold autoregressive model applied to the data indicates that the unemployment rate in Poland is a nonlinear process and, therefore, supports the hysteresis of unemployment theory. Keywords: unemployment, hysteresis, threshold autoregression model, unit root tests JEL classification codes: C22, J64 Article submitted April 25, 2018, accepted for publication January 16, 2019. * 1 University of Agriculture in Kraków, Institute of Economic and Social Sciences, Department of Economics and Economic Policy; e-mail: The research was supported by the Polish Ministry of Science and Higher Education using funds for statutory activities by young researchers. The author would like to thank the anonymous reviewers for their helpful comments and suggestions. 136 GOSPODARKA NARODOWA 1(297)/2019 Introduction There are two alternative approaches in the literature on the dynamics of unemployment. The first approach is based on the theory of the natural rate of unemployment introduced by Friedman [1968] and Phelps [1967, 1968]. Under this theory, the economy can depart from the natural rate of unemployment in the short run due to nominal shocks. However, in the long run, the economy is expected to achieve an equilibrium indicated by the natural rate of unemployment. The second approach to the dynamics of unemployment was presented by Blanchard and Summers [1986], who proposed what is known as the hysteresis theory. The authors suggested that high and persistent unemployment is the result of nominal or real shocks. They argued that theories advocating the existence of a natural rate of unemployment or a non-accelerating inflation rate of unemployment (NAIRU) failed to identify the endogenous impact of a surge in unemployment on the long-run natural rate. The assessment of the hysteresis issue has important policy implications. Blanchard and Summers [1986] claim that their wage-barraging model, which explains the causes of the hysteresis of unemployment, indicates that demand expansionary policy can have a long-term impact on the level of unemployment. The demand shocks triggered by this kind of policy can lower unemployment regardless of its source. However, according to Blanchard and Summers [1986], such positive effects can only be achieved when the demand expansionary policy is unexpected. Also, supply shocks can cause similar positive effects. According to the statistical approach, the two above-mentioned theories can be described in the following way: the natural rate hypothesis implies that the deviations in unemployment from the natural rate are temporary, and therefore the unemployment rate will be a stationary series with a stable long-run steady state. Meanwhile, the strictest form of hysteresis implies that all shocks to unemployment will result in permanent effects and the unemployment rate will be a non-stationary series with a unit root. In literature, there are several approaches applied in testing hysteresis in unemployment. The first approach is based on the classical unit root tests, i.e. usually the Augmented Dickey-Fuller (ADF) or Phillips-Perron tests. The second strand of literature considers the existence of structural breaks in the unemployment rate. In the third approach, panel data is used to increase the power of the tests. Panel unit root tests can also account for structural breaks in the unemployment rate. A thorough review of the applied studies concerning testing hysteresis in unemployment is offered by Lee and Chang [2008]. It is well known that unemployment rises faster during a recession than it falls during a boom [Akdoğan, 2017]. Due to this asymmetry, conventional unit root tests fail to reject the non-stationary hypothesis, since, as pointed out by Caner and Hansen [2001], they do not differentiate nonlinearity from non-stationarity. Therefore, there is a need to account for this asymmetry. The first approach to address the asymmetry is the above-mentioned unit root tests with structural breaks. It was proved that unit root tests, which ignore the Andrzej Pisulewski, The Dynamics of Unemployment in Poland from 1992 to 2017 137 possibility of structural breaks, may erroneously show the presence of hysteresis. For instance, Papell et al. [2000], by introducing structural breaks, rejected the null hypothesis of non-stationarity in 10 of 16 OECD countries, in which they previously failed to reject the null hypothesis using the ADF test. The second approach is the use of nonlinear models and the particularly appealing threshold unit root test proposed by Caner and Hansen [2001].a Taking the above approaches into account, the main aim of this study is to check the hypothesis of hysteresis in unemployment in Poland. Another aim is to determine whether the rate of unemployment in Poland is a nonlinear process. Finally, regarding the above-presented shortcomings of conventional unit root tests, it would be interesting to verify the hypothesis of the unemployment rate in Poland with a threshold unit root test. Taking into account economic policy, the failure to reject the null hypothesis of non-stationarity means that shocks to the unemployment rate will have a permanent effect on its level, while nonlinearity of the unemployment rate indicates that its response to shocks is asymmetric. The possibility of hysteresis of unemployment in Poland was first pointed out by Wojtyna [1994]. While the issue of estimating the natural rate of unemployment for the Polish economy was frequently analysed, for example by Socha and Sztanderska [2000], Kwiatkowski [2002], Arendt [2005], Kelm [2009], Roszkowska [2013], and Welfe and Leszkiewicz-Kędzior [2013], the problem of hys (...truncated)