Hysteresis - Hysteresis in Economics

Hysteresis in Economics

Economic systems can exhibit hysteresis. For example, export performance is subject to strong hysteresis effects: because of the fixed transportation costs it may take a big push to start a country's exports, but once the transition is made, not much may be required to keep them going.

Hysteresis is used extensively in the area of labor markets. According to theories based on hysteresis, economic downturns (recession) result in an individual becoming unemployed, losing his/her skills (commonly developed 'on the job'), demotivated/disillusioned, and employers may use time spent in unemployment as a screen. In times of an economic upturn or 'boom', the workers affected will not share in the prosperity, remaining long-term unemployed (over 52 weeks). Hysteresis has been put forward as a possible explanation for the poor unemployment performance of many economies in the 1990s. Labor market reform, or strong economic growth, may not therefore aid this pool of long-term unemployed, and thus specific targeted training programs are presented as a possible policy solution.