Hysteresis in Unemployment: A Quick Refresher Note

Abstract: Against the background of the rising tide of unemployment which has swept over most of the OECD countries since the early 1970s, the recent deterioration of labour market conditions has prompted fears that unemployment may become endemic in many countries. The experience of the past two decades, in particular in many European countries, does indeed suggest that unemployment after ratcheting up in cyclical downturns shows little tendencies to return to pre-shock levels when economic conditions improve. The apparently very weak self-correcting mechanisms with respect to unemployment have lent support to the hypothesis that there may be mechanisms that work that tend to transform cyclical shocks to unemployment more or less into changes in equilibrium unemployment. This phenomenon has been labeled as hysteresis or persistence. The purpose of this note is to provide an overview exposition of the hysteresis issue for non-specialized readers.;