Hysteresis

Question 1

What is hysteresis?

Answer 1

The history of a system affects the future of the system

Question 2

What does hysteresis mean in terms of unemployment?

Answer 2

• Hysteresis would mean that a history of being unemployed in the past may make a worker more likely to be unemployed in the future

Question 3

What are the three main causes of hysteresis?

Answer 3

• The insider- outsider effect
  -The long term unemployed withdraw
  -Capacity scrapping

Question 4

How does the insider effect affect hysteresis?

Answer 4

• A fall in AD reduces output and employment
• 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

Question 5

How does long term- unemployed withdraw cause hysteresis?

Answer 5

• People who are unemployed for a long time may lose their skills, or have less motivation to work in the future
• The unemployed outsiders become poor substitutes for workers in work. So the pool of available labour to do a given job falls.

Question 6

How does capacity scrapping affect hysteresis?

Answer 6

• 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