The Macroeconomic Consequences of Long‐Term Unemployment

Abstract This article examines the linkages between long‐term unemployment and two important recent debates in Australia: first, whether unemployment exhibits hysteresis tendencies; second, the nature of the relationship between unemployment and real wages. Our findings favour the hysteresis account in that the evidence rejects an equilibrium relationship between long‐term and total unemployment. Also, the effect on real wages of an increase in the number of longterm unemployed is found to be both positive and significant.