Hysteresis in unemployment

an article by Terry O'Shaughnessy (St Anne’s College, Oxford) published in Oxford Review of Economic Policy Volume 27 Number 2 (Summer 2011)

Abstract

Unemployment has risen sharply in a number of countries and it appears to be becoming more persistent. The experience of the 1970s and 1980s showed that adverse unemployment shocks could have long-lasting effects with very serious economic and social consequences. A key mechanism producing these adverse consequences was hysteresis¹ in unemployment whereby temporary rises in unemployment generated by supply and/or demand shocks had permanent (or, at least, very persistent) effects. Clearly, it is important to understand how hysteresis mechanisms might operate in order to avoid such adverse outcomes. On the other hand, experience during the subsequent two decades showed that, under more favourable macroeconomic conditions, it is possible to observe “good” hysteresis effects. Now is a very appropriate time to re-visit the issue of hysteresis in unemployment in order to avoid the errors of the 1970s and 1980s and, if possible, to get hysteresis effects working in a positive direction.

¹Hysteresis is the dependence of a system not just on its current environment but also on its past. (Wikipedia)

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