Hysteresis Theoretical Arguments
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Question: Please explain briefly whether the theoretical arguments for hysteresis are consistent with the empirical evidence on unemployment.
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Solution Summary
The expert explains whether the theoretical arguments for hysteresis are consistent with the empirical evidence on unemployment.
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Here's a great paper to start:
http://www.nber.org/chapters/c4245.pdf
First of all, let's define Hysteresis:
It refers to a situation where workers can alter the nature of their work environment after a period of high unemployment.
To make this clearer - a society experiences a period of high unemployment, say 10%. This means that, for any given firm, there are fewer workers, since many have been laid off. The problem for the firm is that the workers left (we presume they are indispensable) then have a tremendous amount of leverage against the firm in two ways.
1) Because there are fewer workers, the firm depends on them more - they are just more valuable, regardless of the state of the economy, and 2) as the economy gets better and unemployment falls, these remaining workers can almost charge "rents" for their position. They can keep out new hires due to their influence in the firm.
So what's the implication? The main issue is that, when an economy experiences a shock of high unemployment, then when the economy recovers, the unemployment rate remains higher than from before the shock, since the workers remaining have created a secure "nest" for themselves and don't want competition that might lower wages.
The evidence of this has ...
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