Long Term Unemployment

Question 1

What is Hysteresis?

Answer 1

Equilibrium of dynamic systems depends on the past history of the system.

Path dependence.

Several rounds of high cyclical unemployment can result in a higher equilibrium unemployment rate.

Question 2

What curve does hysteresis work through?

Answer 2

The wage setting curve.

People who have been out of employment for a long time have a less competitive impact on the labour market.

As shocks occur and unemployment rises, more and more people stop looking for jobs and become long term unemployed.

Question 3

Why are long-term unemployed less competitive in the labour market?

Answer 3

Because they experience skill deterioration, and employers favour people who have a consistent record of being in work than those who have significant gaps in their cv.

LT unemployed ppl are OUTSIDERS.

Question 4

Long Term Unemployment in the UK.

Answer 4

Significant falls in long term unemployment between 2013 and 2019 from around 900,000 to nearly 300,000..

Currently around 360,000

Question 5

Long term Unemployment and WS Curve

Answer 5

The higher the proportion of long-term unemployed, the wage setting curve will shift upwards

Question 6

Draw long term unemployment via WS/PS diagram and provide an explanation

Answer 6

Government wants to tackle inflation, so raises interest rates. This generates an output gap, leading to a fall in employment. Move down the initial WS curve.

However, this low level of demand is insufficient to create new jobs, leading to a rise in the share of long term unemployed. This shifts the WS curve up. Eventually, as the CB lowers rates, this raises demand and reduces firm’s cost, leading to a rise in employment.

This level of employment is still higher than the original equilibrium rate