A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market


Krolzig, Hans-Martin, Marcellino, Massimiliano and Mizon, Grayham E. (2002) A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market. Empirical Economics, 27, (2), 233-254. (doi:10.1007/s001810100117).

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Original Publication URL: http://dx.doi.org/10.1007/s001810100117

Description/Abstract

There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. In this paper we present a statistical model that offers a congruent representation of part of the UK labour market since the mid 1960s. We use a cointegrated vector autoregressive Markov-switching model in which some parameters change according to the phase of the business cycle. Output, employment, labour supply and real earnings are found to have a common cyclical component.

The long run dynamics are characterized by one cointegrating vector relating unemployment to trend-adjusted real wages and output. Despite there having been many changes affecting this sector of the UK economy, the Markov-switching vector-equilibrium-correction model with three regimes (representing recession, normal growth, and high growth) provides a good characterization of the sample data, and performs well relative to alternative linear and non-linear models. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established, and demonstrate the advantages of generating regime dependent responses.

Item Type: Article
ISSNs: 0377-7332 (print)
Related URLs:
Keywords: business cycles, employment, impulse-response analysis, cointegration, regime shifts, markov switching
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 35032
Date Deposited: 18 May 2006
Last Modified: 27 Mar 2014 18:21
Contact Email Address: grayham.mizon@soton.ac.uk
URI: http://eprints.soton.ac.uk/id/eprint/35032

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