A-A* (AO3/4) - Hysteresis
Economics: Edexcel A A Level, topic 3.1.8
What Causes Hysteresis?
There are 3 main theories about what causes hysteresis in unemployment.
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.
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.
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.
Test yourself on A-A* (AO3/4) - Hysteresis
What are the 3 main causes of hysteresis?
Which example is often cited as an example of the insider-outsider effect in action?
Which of the following is the insider-outsider effect most likely to explain in an economy?