The link between unemployment and industrial production: the Fourier approach with structural breaks

The purpose of this study was to investigate the long-term relationship between unemployment and industrial production during structural breaks in the United States. We used monthly data from the Industrial Production Index and the unemployment rate between January 1948 and October 2018 to analyze this relationship. We found the stationarity of the time series used using the Fourier KPSS stationarity test, which enabled a stationarity analysis, including with the existence of structural breaks. Asa result of the stationarity analysis, we did not find any stationarity in either series. We then used a Fourier Shin cointegration analysis to investigate the long-term relationship between the industrial production index and the unemployment rate. This test demonstrates its difference from other cointegration tests considering the time and shape of these breaks in the presence of structural breaks. According to the cointegration analysis results, we found a long-term relationship between the U.S. unemployment rate and the industrial production index variables. These results indicate that sudden structural changes in the industrial production index have an effect on the U.S. unemployment rate in the long term. We then used the Least Squares with Breaks Bai-Perron break type method to determine the structural break periods and the coefficients of these periods. We found the years 1958, 1974, 1990, and 2007 to be when the structural changes occurred.