Hysteresis

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Financial Terms and Glossary

Hysteresis

In economics, hysteresis refers to the phenomenon where short-term shocks to the economy, such as high unemployment or a recession, have long-lasting effects even after the shock has passed. Hysteresis implies that once an economy experiences a downturn, it may not fully recover to its previous levels of output or employment, leading to persistent economic stagnation. The concept highlights the long-term impact of temporary economic events on labor markets and growth potential.

Example

After a severe recession, a country’s unemployment rate remains high for years, even after the economy begins to grow again, due to the loss of skills and long-term joblessness, illustrating hysteresis.

Key points

• Describes the long-lasting effects of short-term economic shocks.

• Commonly seen in labor markets, where unemployment persists after recessions.

• Highlights the difficulty of returning to previous economic levels after a downturn.

Quick Answers to Curious Questions

How does hysteresis affect labor markets?

Hysteresis can lead to long-term unemployment, as workers lose skills and struggle to re-enter the workforce, even after the economy recovers.

What causes hysteresis in the economy?

Factors include prolonged economic downturns, loss of productivity, and structural changes that prevent full recovery after a shock.

How can governments address hysteresis?

Policies like retraining programs, targeted fiscal stimulus, and measures to improve labor market flexibility can help mitigate the long-term effects of hysteresis.