Hysteresis & the Unemployment Problem

Summers and Blanchard have a paper on Hysteresis in Europe in the 1980s in which they discuss three main potential causes of hysteresis, which is a very high dependence of current employment on past unemployment. The three causes are (1) physical capital, (2) human capital, and (3) insider outsider models of wage determination.

They largely dismiss (1) and don’t think (2) is sufficient to explain what they see in the data, but it’s interesting to read their description of how (2) works in light of today’s persistently elevated level of unemployment.

The second and perhaps more important mechanism works through human capital, broadly defined.  […] Essentially, the human capital argument holds that workers who are unemployed lose the opportunity to maintain and update their skills by working. Particularly for the long term unemployed, the atrophy of skills may combine with the disaffection from the labor force associated with the inability to find a job to reduce the effective supply of labor. Early retirement may be a semi-irreversable decision. More generally, if for incentive or human capital reasons employers prefer workers with long horizons, it may be very difficult for middle-aged workers to find new jobs. A final point is that in a high-unemployment environment, it will be difficult for reliable and able workers to signal their quality by holding jobs and being promoted. The resulting inefficiencies in sorting workers may reduce the overall demand for labor.

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
This entry was posted in Uncategorized and tagged , , , , , , , , , , . Bookmark the permalink.

1 Response to Hysteresis & the Unemployment Problem

  1. Pingback: Historical Hysteresis: Adverse Shocks vs Structural Problems | owenzidar

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s