Analysing unemployment hysteresis in eurozone with the second generation panel unit root tests

This paper tests unemployment hysteresis using second generation panel unit root tests for 12 European Union countries using the Euro as a common currency for the time period 1999-2012. The analyzes are performed with SURADF and CADF panel unit root test taking into account the cross-sectional dependence between individuals. The empirical findings of SURADF test indicate the effect of hysteria for countries Portugal, Greece and Austria, and the empirical findings of CADF test indicate the effect of hysteria for countries Greece, Ireland and Austria. Namely, unemployment series of these countries are not stationary, they contain unit root. For the other 9 countries, the unemployment series is stationary; the existence of the hysteresis effect in unemployment is not accepted. In these countries, temporary shocks do not leave lasting effects. Shocks do not lead to structural transformations on employment. This results reveals that in most of the euro zone’s countries, not hysteria hypothesis but the natural rate of unemployment hypothesis is valid.