Hysteresis in Unemployment

Abstract

After two decades of ratcheting unemployment in Europe, most economists agree that structural changes associated with higher equilibrium rates of unemployment have occurred. But the direction of causality is a matter of controversy: Have the structural changes caused the long‐lasting increases in actual unemployment? Or have the increases in actual unemployment caused the structural changes? The latter possibility is often referred to as hysteresis. During the past decade, a distinct research program has evolved around the idea that equilibrium employment tracks actual unemployment. This survey reviews the various hysteretic explanations offered in the literature and evaluates their empirical standing.

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