Hysteresis in unemployment

Unemployment has risen sharply in a number of countries and it appears to be becoming more persistent. The experience of the 1970s and 1980s showed that adverse unemployment shocks could have long-lasting effects with very serious economic and social consequences. A key mechanism producing these adverse consequences was hysteresis in unemployment whereby temporary rises in unemployment generated by supply and/or demand shocks had permanent (or, at least, very persistent) effects. Clearly, it is important to understand how hysteresis mechanisms might operate in order to avoid such adverse outcomes. On the other hand, experience during the subsequent two decades showed that, under more favourable macroeconomic conditions, it is possible to observe 'good' hysteresis effects. Now is a very appropriate time to re-visit the issue of hysteresis in unemployment in order to avoid the errors of the 1970s and 1980s and, if possible, to get hysteresis effects working in a positive direction. Copyright 2011, Oxford University Press.