Hysteresis
Also called: Unemployment hysteresis · Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT
Meaning
Hysteresis means high unemployment persists even after the recession that caused it has ended. People who stay out of work for a long time lose skills, confidence and contacts, so employers find them harder to hire. This pushes up the natural rate of unemployment, which is the unemployment an economy has in normal times. In short, a temporary shock leaves a lasting scar.
Example
After COVID-19, economists debated "scarring". The worry was that workers who lost jobs or dropped out during the 2020 lockdown would find it harder to get back into good jobs, even after the economy recovered.
Don't confuse with
- Cyclical unemployment: this falls on its own when demand recovers. Under hysteresis, unemployment stays high after the recovery because the natural rate itself has risen.
Related concepts
- Voluntary unemployment
- Involuntary unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Technological unemployment
- Natural rate of unemployment
- Okun's law
- Efficiency wage
- Labour arbitrage