3.1.8

A-A* (AO3/4) - Hysteresis

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What Causes Hysteresis?

There are 3 main theories about what causes hysteresis in unemployment.

Illustrative background for The insider-outsider effectIllustrative background for The insider-outsider effect ?? "content

The insider-outsider effect

  • A fall in AD reduces output and employment as some people lose their jobs.
  • The insiders who keep their jobs have strong bargaining power inside their firms. Their firm-specific skills and bargaining power mean that they claim wage rises, rather than hiring more 'outsiders'.
  • Some people argue that this happened in Spain after the Eurozone crisis from 2009-2015.
Illustrative background for The long-term unemployed withdrawIllustrative background for The long-term unemployed withdraw ?? "content

The long-term unemployed withdraw

  • People who are unemployed for a long time are likely to lose their skills, or they may become less motivated to do work in future.
  • The unemployed outsiders become poor substitutes for workers in work. So the pool of available labour to do a given job falls.
Illustrative background for Capacity scrappingIllustrative background for Capacity scrapping ?? "content

Capacity scrapping

  • When AD falls and output falls, firms may close some factories or offices. They scrap some of their output capacity.
  • When AD recovers, firms reach high capacity utilisation earlier.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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