Hysteresis in unemployment: do structural breaks and aggregation matter? The case of Italy

In this paper we test for hysteresis in the Italian unemployment using two recently proposed unit root and stationarity tests which allow for the presence of structural breaks. The analysis conducted at the regional level reveals that the finding of hysteresis in national Italian unemployment appears to be mainly the result of the aggregation of regional trend-stationary series characterized by heterogeneous breaks. A structuralist view based on the presence of unequal regional unemployment natural rates seems therefore to emerge for Italy. Furthermore, the results of a standard structural unemployment model estimated for the Italian regions corroborate this view and offer an alternative prospect for the policy intervention design. In particular we find that the same institutional variables have very different power in explaining long run unemployment when heterogeneous breaks across regions are at work.