Research Teams

DT 11/13 - The Chain Reaction Approach: an application for Uruguayan unemployment dynamic

ISSNISSN/ISBN: 1510-9305
The aim of this paper is to explain the Uruguayan unemployment dynamic using the theoretical framework of the Chain Reaction Theory (CRT). Changes in unemployment are viewed as “chain reactions” of responses to external shocks, working their way through systems of interaction lagged adjustment processes. CRT is a holistic approach, which allows us to evaluate whether the long term unemployment rate would converge to equilibrium level or is explained by the interplay between external shocks and lagged adjustment processes, which are never completed. Our empirical results indicates: (i) the “unemployment invariance hypothesis” of NAIRU approach is rejected; (ii) inertia on adjustment processes is confirmed; (iii) the interactions between lagged adjustment processes are complementary (iv); and labor market exogenous variables contribute to explain long term evolution of unemployment rate. These findings are relevant because Uruguayan unemployment rate showed frequently deviations with high persistence and their political implications form CRT perspective.
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