Investigating the Hysteresis Phenomenon in Unemployment Rate of Economy of Iran

Iran is among the countries with high and persistent rates of unemployment. The unemployment trend in Iran shows particular feature of being permanent at high levels while indicating no convergence to a unique value. The present research examines the hysteresis hypothesis in unemployment rate in Iran. Hysteresis is dependency on the past history; therefore hysteresis in unemployment implies that unemployment rate is related to its past history. Therefore, all shocks have permanent effect on unemployment; so, economy doesn’t reach to a long-run equilibrium as it is changing constantly. This study investigates the impact of hysteresis in unemployment ratein Iran during 1959 and 2011 by using time-series data and traditional and modern method of unit root test that considers structural breaks exogenously and endogenously. Results show existence of this phenomenon in unemployment rate. Therefore, in Iran, during the period of this study, the natural rate of unemployment has followed the path of the current unemployment rate. Therefore, policymakers should be mindful of the demand side policies while considering that high level of unemployment, if not tackled, may persist permanently and continue to be a serious problem for the economy.