A note on Southeast Asian hysteretic unemployment

• Main Authors: Eng, Yoke-Kee, Wong, Chin Yoong
• Format: Conference or Workshop Item
• Language: English
• Published: 2007
• Subjects: HC Economic History and Conditions
• Online Access: http://repo.uum.edu.my/2408/1/Eng_Yoke-Kee_2.pdf; http://repo.uum.edu.my/2408/

The present paper as a first trial attempts to examine if unemployment rates in Southeast Asia demonstrate hysteresis, and to find out the propagation mechanism at work. By using the standard Augmented Dickey-Fuller (ADF) test, Schmidt and Phillips, and Lee and Strazicich LM unit root test respectively without and with structural breaks, we found that our sampled countries exhibit no hysteresis in unemployment rates. We then set up a standard New Keynesian dynamic IS-AS model to propose that the underlying factors are greater economic openness alongside preference over inflation stabilization in the policy reaction function. Southeast Asian that integrates well into the world economy with relatively free flow of foreign goods, capitals and labors has obtained greater flexibility in labor markets. The latter should be an important factor that destructs the insider-dominated wage determination mechanism, the bedrock of hysteresis in unemployment, as labor replacement now become less costly. The model also suggests that enhanced price flexibility signals that the central bank shall respond less to the output gap. According to the derived non-hysteretic unemployment condition, the monetary policy should be driven mainly towards stabilizing the inflation rates. The informal pegging to US dollar of Southeast Asian currencies over the years naturally serves as prima facie to the preference on stabilizing the inflation rates, which, in turn, contributes to the absence of hysteresis in unemployment.