A Markov-switching vector equilibrium correction model of the UK labour market

Krolzig, Hans-Martin, Marcellino, Massimiliano and Mizon, Grayham E. (2000) A Markov-switching vector equilibrium correction model of the UK labour market , Southampton, UK University of Southampton, Department of Economics 20pp. (Discussion Papers in Economics and Econometrics, 105).


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There is a wide literature on the dynamic adjustment of employment and its relationship with the business cycle. Our aim is to propose a statistical model that offers a congruent representation of post-war UK labour market. We use a cointegrated vector autoregressive Markov-switching model where 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 two cointegrating vectors: trend-adjusted labour productivity and the labour share. 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, growth and high growth provides a good characterization of the sample data over the period 1966(3)-1993(1) In an out-of-sample forecast experiment over the period 1991(2)-1993(1) it beats linear and non-linear model alternatives. The results of an impulse-response analysis highlight the dangers of using VARs when the constancy of the estimated coefficients has not been established.

Item Type: Monograph (Discussion Paper)
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Keywords: business cycles, employment, impulse-response analysis, cointegration, regime shifts, markov switching
ePrint ID: 33099
Date :
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Date Deposited: 18 May 2006
Last Modified: 16 Apr 2017 22:18
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/33099

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