Unemployment Hysteresis - Being Out Of Work For A Long Time
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Being out of work for a long time is socially, economically and individually negative. This type of situation is referred to as hysteresis. This concept has been borrowed to social and economic sciences, and now we can talk about unemployment hysteresis.
What is hysteresis?
Hysteresis in the field of economics refers to an event in the economy that persists even after the factors that led to the event or otherwise proceed are removed. Hysteresis often occurs after extreme or prolonged economic events, such as an economic crash or recession. For example, after a recession, the unemployment rate may continue to rise despite economic growth and the technical end of the recession.
In short, hysteresis in an economy occurs when the long run equilibrium is dependent on how that equilibrium has changed in the short run.
Genesis
The term hysteresis was coined by Sir James Alfred Ewing, a Scottish physicist and engineer (1855-1935), to refer to systems, organisms and fields that have memories. In other words, the consequences of some inputs are felt with some time delay. Hysteresis comes from the Greek word for scarcity or scarcity.
Example of hysteresis
The recession that Britain experienced in 1981 is a good illustration of the effects of hysteresis. During the country's recession, unemployment skyrocketed from 1.5 million in 1980 to 2 million in 1981. After the recession, unemployment rose to over 3 million between 1984 and 1986. The turmoil of the recession resulted in structural unemployment that persisted during the economic recovery and became difficult to manage.
Types of hysteresis
Unemployment rate hysteresis
A typical example of hysteresis is the lagged effects of unemployment, where the unemployment rate may continue to rise even after an economic recovery begins. To understand the unemployment hysteresis, we must first examine the types of unemployment. During a recession, i.e. two consecutive quarters of declining growth, unemployment rises.
When a recession occurs, cyclical unemployment rises as the economy experiences negative growth rates. Cyclical unemployment rises when the economy is underperforming and falls when the economy is growing. Workers lose their jobs when companies make redundancies during a period of low demand and declining corporate revenues. When the economy re-enters the expansion phase, it is expected that businesses will start hiring unemployed people again and the unemployment rate in the economy will begin to fall towards the normal or natural rate of unemployment until cyclical unemployment drops to zero. This is of course the perfect scenario. However, hysteresis tells a different story.
Hysteresis states that as unemployment rises, more people adjust to a lower standard of living. By getting used to a lower standard of living, people may not be as motivated to achieve the previously desired higher standard of living. In addition, as more and more people become unemployed, it is socially acceptable to be or remain unemployed. Most importantly, employers themselves have been hit hard during the crisis and will be more likely to demand more from their remaining workforce before incurring greater labor costs.
Hysteresis caused by technology
Unemployment hysteresis can also be seen when companies switch to automation during a market downturn. Workers without the skills required to operate these machines or newly installed technology will become unemployed as the economy begins to recover. In addition to employing only tech-savvy employees, these companies will ultimately have fewer employees than before the recession phase.
How to prevent hysteresis?
Economies in recession and hysteresis where the natural rate of unemployment is rising tend to use economic incentives to combat the resulting cyclical unemployment. Expansionary monetary policy by central banks may also include an increase in government spending in regions or industries most affected by unemployment.
However, hysteresis is more than cyclical unemployment and may persist long after the economy recovers. In the case of long-term problems, such as a lack of skills caused by technological advances, vocational training programs can be helpful in combating hysteresis.
Source: investopedia.com, Begg D., Fischer S., Dornbusch R. Macroeconomy
