Persistent high unemployment has fostered the employment persistency hypothesis
according to which employment changes are driven by unanticipated shocks whereas anticipated
shocks that potentially could change employment are absorbed by wage
changes. Empirical tests of the persistency hypothesis fail to distinguish between the
properties of shocks and endogenous propagation mechanism causing persistency. This paper
develops a new test strategy by explicitly distinguishing between these two factors. The
methodology is applied to the manufacturing sector in Denmark, and some support
in favor of an endogenous propagation mechanism causing employment persistency
is found.
