Long-run unemployment: natural or epiphenomenal?
University of New Brunswick
The “natural rate of unemployment” (NRU) hypothesis has been the dominant hypothesis on long-run unemployment for many decades, despite lots of evidence against it. In this report, the main criticisms of the NRU hypothesis will be surveyed, and an alternative hypothesis – hysteresis – will be presented and explored. This is followed by a survey of the different ways of empirically testing the NRU hypothesis against the hysteresis hypothesis, and the results of these tests. These results show that neither hypothesis has conclusive empirical support. Hence, hysteresis cannot be ignored in favor of the NRU. Finally, we carry out some preliminary tests using provincial unemployment rate data and show that “hysteresis” may be affecting unemployment in most of the provinces.