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Hysteresis in Unemployment: Old and New Evidence

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This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.

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... Gordon (2011) shows Equation (2) can be interpreted not only by adaptive expectations but also by inertia (due to sticky prices, lengthy contracts, and also input-output supply chains), which is also compatible with rational expectations. Equation 3 represents a simplified version of the accelerationist Phillips curve (Taylor 2000, Ball 2009). ...
... 26 Besides introducing a time-varying NAIRU, many authors opt to widen the variety and the impact of supply shocks other than the traditional "food and energy" in the model 27 . Changes in the trend growth of labor productivity is added in a few articles improving the forecast performance of the model for the US (Gordon, 2013;Ball andMoffit, 2001 andBall andMankiw, 2002). In this case, there is always the assumption that the impact is restricted to the short (or medium) run and will eventually be reversed, keeping the assumption of the accelerationist model that long-run inflation is a demand phenomenon. ...
... 26 Besides introducing a time-varying NAIRU, many authors opt to widen the variety and the impact of supply shocks other than the traditional "food and energy" in the model 27 . Changes in the trend growth of labor productivity is added in a few articles improving the forecast performance of the model for the US (Gordon, 2013;Ball andMoffit, 2001 andBall andMankiw, 2002). In this case, there is always the assumption that the impact is restricted to the short (or medium) run and will eventually be reversed, keeping the assumption of the accelerationist model that long-run inflation is a demand phenomenon. ...
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The aim of this paper is twofold: first, to analyze critically the mainstream empirical and theoretical attempts to keep the accelerationist Phillips curve alive; and second, to propose an alternative way of thinking about the relation between (wage and price) inflation and unemployment rate. The mainstream view, which is based on the idea of scarcity of labour and full incorporation of expectations in wages, will be criticized. And it will be shown that all the recent empirical puzzles can be better understood if we drop these neoclassical hypotheses about the functioning of the labour market and replace them by a conflict augmented Phillips curve in which inflation is a result of conflicting claims over income distribution, which are mediated by institutional arrangements and political power relations and there is no labour scarcity.
... Mainstream theory proposes that unemployment is determined by demand management policies, especially monetary policy, in the short-run whereas it is the labour market conditions that determine the level of NRU or NAIRU in the long run. The NRU or NAIRU can change only by changes coming from the supply side of the economy with hardly any effects from demand (Ball, 2009). ...
... In contrast with the classical dichotomy that monetary policy is totally ineffective on unemployment in the long run, there is also the alternative "hysteresis" hypothesis with the assertion that demand management policies can have strong effects on unemployment. According to hysteresis there is a level of NAIRU in the economy with the corresponding steady rate of inflation, however changes in the level of unemployment will also cause NAIRU to change over time (Ball, 2009). ...
... In the short-run imperfect information, long-term labour contracts, adjustment costs or departures from rationality distort expectations and monetary neutrality assumption of the Classics breaks down. In the long run unemployment returns to NRU (Ball, 2009). ...
... However, hysteresis is a phenomenon in search of a consensus explanation (Ball, 2009(Ball, , 2014. After discussing those advanced in the literature, we conclude that the explanation based on the impact of aggregate demand on capital formation is the most consistent with the empirical evidence presented in this paper and is also the most persuasive on more general grounds. ...
... However, hysteresis is a phenomenon in search of a consensus explanation (Ball, 2009(Ball, , 2014. After discussing those advanced in the literature, we conclude that the explanation based on the impact of aggregate demand on capital formation is the most consistent with the empirical evidence presented in this paper and is also the most persuasive on more general grounds. ...
... These explanations of hysteresis have not found empirical support. Much research has shown the very little impact of EPL, including the generosity of unemployment benefits, on labour market performances (see Baker et al., 2005;Baccaro and Rei, 2007;Ball, 1999Ball, , 2009Stockhammer and Sturn, 2012;Brancaccio et al., 2018). All in all, currently this interpretation appears to be dismissed or downplayed even by earlier supporters (Blanchard and Katz, 1997, pp. ...
Article
Empirical works documenting highly persistent effects of negative demand shocks ('hysteresis') have questioned the prevailing wisdom that potential output is exogenous to aggregate demand fluctuations. We assess whether the effects of positive demand shocks also tend to persist beyond the short run. We estimate the impact of 126 aggregate demand expansions in OECD countries between 1960 and 2015 through local projections, using a dynamic two-way fixed-effects model and a propensity score-based specification. We find that demand expansions exert positive persistent effects on GDP, participation rate and capital stock. Effects on the unemployment rate and productivity are also strong and quite persistent, but evidence regarding their permanence is mixed. The effect on the inflation rate is positive but small and imprecisely estimated, and there is no sign of accelerating inflation. Our results bear relevant implications for existing models of hysteresis and for theories of demand-led growth.
... By contrast, a relatively small number of empirical studies have challenged this assumption of macroeconomic asymmetry. Ball (1999Ball ( , 2009 shows that expansionary monetary policies favour recovery after a recession without generally causing persistent or high inflationa result confirmed and extended by Stockhammer and Sturn (2012). O'Shaughnessy (2011), looking at the UK and the US experiences over a long time-span, argues that hysteresis can also be observed in expansions. ...
... 67-69;Blanchard, 2006, p. 30). Other works have pointed to the role of aggregate demand and monetary policy responses to downturns in causing the persistence of unemployment and its diversity across countries (Ball, 1999(Ball, , 2009Stockhammer and Sturn, 2012;Cerra et al., 2013). ...
... Evidence against an irreversible relation, implying that once long-term unemployment has been created it tends to persist even when unemployment declines, is also found in Webster (2005), who analyses UK data between 1940 and 2004 and shows there has been a constant and symmetric relationship between these two variables. A similar conclusion in a different context is reached by Ball (1999Ball ( , 2009, who finds that expansions in OECD countries have caused temporary run-ups in inflation but persistent reductions in long-term unemployment. The latter is therefore regarded as reversible, albeit at the cost of a degree of inflation. ...
Article
Hysteresis is receiving renewed interest and empirical support but the mechanisms behind it need better understanding. As a novel contribution to such understanding we empirically assess the interpretation according to which long-term unemployment causes hysteresis by increasing the NAIRU. We analyse a panel of 25 OECD countries over a long time span along two lines of enquiry. First, we verify whether long-term unemployment is ‘reversible’. Second, we focus on episodes of strong long-term unemployment reduction to check for inflationary effects in the subsequent years. We find a strong association between total and long-term unemployment rates even in upswings, testifying to macroeconomic reversibility. We do not find accelerating or persistently higher inflation after episodes of strong decline in long-term unemployment, even when the economy is estimated to be above its potential. Our results cast doubt on this explanation of hysteresis and challenge the notion of NAIRU as an inflationary barrier.
... Франц, В.,1996, Пазарът на труда, София: издателство "Алтенбург" и др.80 Във вектора участват логаритмите на променливите.81 Франц, В.,1996, Пазарът на труда, София: издателство "Алтенбург" и др. ...
... Ball, Laurence, 2009, "Hysteresis in Unemployment: Old and New Evidence," NBER Working Paper No. 14818 (Cambridge, MA: National Bureau of Economic Research).110 Blanchard, Olivier J., Summers, Lawrence H.,1986, "Hysteresis and the European Unemployment Problem," NBER Macroeconomics Annual 1: 15-78. ...
... Ball, Laurence (2009). "Hysteresis in Unemployment: Old and New Evidence," NBER Working Paper No. 14818 (Cambridge, MA: National Bureau of Economic Research). ...
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Основната цел на настоящата монография е да се изследват безработицата и икономическия растеж и да се установи конкретната количествена зависимост между тях на национално ниво, като се направи съпоставка с Европейския съюз като цяло. Законът на Оукън, изразяващ зависимостта между двете икономически променливи, се проявява по специфичен начин в условия на непрекъснати циклични колебания на българската и на европейската икономики и зависи от прилаганите иконометрични модели. Но съгласно получените резултати, законът на Оукън е относително стабилен и следователно е полезен инструмент при разработване, прилагане и прогнозиране на резултатите от провежданите макроикономически политики в България и в Европейския съюз. Книгата би била полезна за изследователите, икономистите, студентите и всички, които проявяват интерес по темата.
... 3 But more importantly for our analysis, this is also the case for the NAIRU. Indeed, there is now a solid empirical evidence in favour of an endogenous NAIRU, which shows considerable degrees of hysteresis and pathdependency with respect to actual unemployment (Ball, 2009;Storm and Naastepad, 2015), and which is strongly influenced by demand-related factors (Stockhammer, 2004;Ball, 2009;1 See Taylor (2017) for a critical analysis of the application of the loanable fund theory to secular stagnation. 2 An alternative "structural" interpretation of stagnation has been elaborated by some heterodox and Marxian economists, who foresaw a permanent decline in the rate of capital accumulation of developed countries due to the intrinsic dynamics and contradictions of capitalist economies, i.e., the increase in oligopolistic concentration, a rise in the profit margins and an increase in excess capacity. 5 Stockhammer and Klär, 2011). All in all, the analysis of an endogenous slowdown in potential GDP caused by endogenous (demand-related) changes in the NAIRU seems a very promising way to apply Hansen's original formulation of secular stagnation to the context of current core and peripheral eurozone countries. ...
... 3 But more importantly for our analysis, this is also the case for the NAIRU. Indeed, there is now a solid empirical evidence in favour of an endogenous NAIRU, which shows considerable degrees of hysteresis and pathdependency with respect to actual unemployment (Ball, 2009;Storm and Naastepad, 2015), and which is strongly influenced by demand-related factors (Stockhammer, 2004;Ball, 2009;1 See Taylor (2017) for a critical analysis of the application of the loanable fund theory to secular stagnation. 2 An alternative "structural" interpretation of stagnation has been elaborated by some heterodox and Marxian economists, who foresaw a permanent decline in the rate of capital accumulation of developed countries due to the intrinsic dynamics and contradictions of capitalist economies, i.e., the increase in oligopolistic concentration, a rise in the profit margins and an increase in excess capacity. 5 Stockhammer and Klär, 2011). All in all, the analysis of an endogenous slowdown in potential GDP caused by endogenous (demand-related) changes in the NAIRU seems a very promising way to apply Hansen's original formulation of secular stagnation to the context of current core and peripheral eurozone countries. ...
Technical Report
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In this paper, we analyse secular stagnation in the eurozone. We adopt a core-periphery perspective, and analyse whether the 2007-2008 financial crisis triggered off diverging dynamics in the growth potential of core and peripheral eurozone countries. We find that secular stagnation affects the whole eurozone, but is a much more serious concern in peripheral countries. Among the components of potential output, the NAIRU shows a worrisome diverging evolution since 2008. It has remained broadly constant in the core whilst doubling in the periphery. We find that the pronounced increase in the NAIRU in the periphery is strongly related to demand-side factors such as investment demand and fiscal consolidation rather than rigid labour market institutions. The negative effect that fiscal contractions may have on the NAIRU is a novel theoretical contribution of this paper. In line with these findings, we argue that reforms in the eurozone should focus on the creation of macroeconomic institutions ensuring convergence in financial and macroeconomic conditions among member countries rather than on the generalised deregulation of labour markets.
... We also consider whether the transitory component of GDP is strongly correlated with standard estimates of the output gap. 4 Consequently, we regard any methodology that produces implausible transitory components of GDP as unreliable for the purpose of searching for hysteresis e¤ects in the data. ...
... 4 We do not include a comparable measure for the Euro Area since it is not publicly available. ...
... However, in this paper's inquiry, what does the hysteresis look like and how would statistical data capture it? Ball's (2009) study is believed to be the leading investigation that explores unemployment in 20 developed countries based on the hysteresis theory. Ball's theoretical view favors the aggregate demand side rather than the aggregate supply side to explain longrun unemployment. ...
... Hysteresis, generally, means the dependency of a phenomenon on its own history. The current study's first hypothesis is stated generally here in accordance with Blanchard and Summers (1986) and Ball (2009): if the actual rate of unemployment is higher than the natural rate, there exist forces that will pull the natural rate to the actual path, which is a long-run mechanism of hysteresis. However, in contrast to Ball's argument for aggregate demand, this paper tests both supply-side and demand-side effects represented by fiscal, nominal, and traderelated activities. ...
Article
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Abstract Distant past experience of economic performance is hypothesized to govern long-run employment performance across 28 European Union (EU) state members. Economic studies usually include lag structure for causality analysis, such as the Wold causal chain and recursive vector autoregression. The inquiry of this paper is different from the literature for two reasons: first, it intends to explain theoretically and empirically how long an influence of significant economic experience in the distant past on long-run unemployment would last. Second, the focus is on the EU due to the ongoing debate over economic integration and independent economies, of which Brexit is one prominent example. Based on panel data, a diagrammatic theory conveys the meaning of the distant past economic experience and its relationship with long-run unemployment in the EU. Empirical investigations include causality tests and long-lasting economic influences, where a new simple approach toward Cholesky decomposition is also demonstrated. The effect of an unexpected shock to inflation on unemployment can remain literally substantive for up to nearly four decades, while unemployment effects of some trade-related innovations can last even longer. The results are supported using analogical reasoning of macroeconomic behaviors incorporated in the original concept of this research.
... Recent research -that emerged across continents since the eruption of the crisis -indicates that fiscal austerity (Bagaria et al., 2012) and disinflation (Ball, 2009) during recession are responsible for rising unemployment levels. Fiscal policy is the key tool for reinvigorating economic activity and compensating for the apathy of private investment. ...
... In a nutshell, the Greek government should appeal for an alternative more realistic economic adjustment programme, in order to plan for a pragmatic exit from depression. Recent research (Ball, 2009;Bagaria et al., 2012) -that emerged across continents since the eruption of the crisis -indicates that fiscal tightening and deflationary measures are dangerous amid recessions and have severe impacts on output and employment. Productive public expenditure or at least a halt on fiscal austerity and the recent tax storm are necessary for re-igniting economic growth. ...
Chapter
The chapter reviews the literature on the development of the financial predicament and its climax into a sovereign debt crisis, and the effect of the latter on the business environment of the Greek economy.
... These asymmetries include not only different gender-specific reactions of unemployment to output fluctuations, but also possible departures of Okun's law from the presumed inverse relationship between output and unemployment. More precisely, albeit unemployment interacts counter-cyclically with output growth, there are well documented cases when this is not observed such as jobless recovery or labor hoarding (Ball et al., 2009;International Monetary Fund, 2010;Gordon, 2010;Oh, 2018). Using annual data for 31 years from 1989 to 2019, the focus is upon the difference version of Okun's law with extended equations for both male and female unemployment. ...
... The findings also support asymmetry in gender-specific responsiveness to output fluctuations. It has been known for some time that the dynamics of male and female unemployment over the business cycle is not gender neutral (e.g., Clark and Summers, 1981;Blank, 1989), and that there is some degree of persistence in the differences between male and female unemployment rates (Quenau and Sen, 2008, 2009, 2010 4 . The former is associated with the stylized fact that women exhibit a more elastic labor supply curve (Peiró et al., 2012;Belaire-Franch and Peiró, 2015), whilst the latter is ascribed to structural and institutional factors such as different labor force participation and industry composition, different job search behavior, anti-discrimination employee protection and gender segregation. ...
Article
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Different asymmetries in Okun’s law for 21 OECD countries over the period 1989–2019 are studied in the paper. To this end, an extended Okun equation accommodating possibly differentiated responsiveness to output and unemployment fluctuations is formulated applicable not only at the level of a whole economy, but also separately to gender-specific parts of the labor market in a system framework. For most of the countries, Okun’s law asserts itself with a greater magnitude in years when output recedes than in those when it grows. In nearly all the countries, Okun’s law is found stronger with decreases in unemployment and weaker or offset with rising unemployment. Finally, in the majority of the countries, male unemployment is more sensitive to output fluctuations than female unemployment, or there is no significant difference whatsoever.
... Small shocks may well have long lasting, if not permanent, effects. The importance of hysteresis of output and unemployment has been remarked, among others, by Hargreaves-Heap (1980), Cottrell (1984-85), Blanchard and Summers (1987), and more recently by Ball (2009), although focusing on different causes. Notice that the implications of hysteresis effects for policy-making are potentially remarkable (e.g. ...
Article
The aim of this paper is to provide a critical review of some recent developments in macroeconomics. We discuss the introduction of financial frictions in New Keynesian models, which is said to account for the increasing influence of financial markets, institutions and products in real-world economies. For this purpose, we compare the macro dynamics of a benchmark NCM-DSGE model with the behaviour of the same model augmented with a financial accelerator mechanism. Our simulation exercises show that the financial accelerator mechanism can be regarded as an effective, though indirect, way to account for hysteresis in potential output. A fundamental policy corollary follows that central banks should pursue financial stability, rather than price stability, and target current output growth, rather than output gap. Such an unconventional result is obtained by a simple macroeconomic amendment to an otherwise conventional NCM-DSGE model.
... Others empirical works have provided evidence, based on the experience of many countries over a long time period, that recessions have persistent effects on the path of GDP. Then it seems not plausible the notion that GDP would return to an independent, supply determined trajectory (Martin et al. [27]; Ball et al. [28]; Ball [29] [30]; Blanchard et al. [17]; Cerra and Saxena [31]; Fatàs and Summers [32]; Reifschneider et al. [33]). In other terms, fluctuations tend to be associated with persistent changes in GDP trajectories, as a result the return to an independently determined GDP trend must be extremely slow (i.e. ...
Article
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This discussion on recent economic literature concerns some issues on potential output and related policy implications. It is not clear to what extent potential output growth has been affected by the recent crisis. Then the actual stabilization policies—based on the existence of output gaps and public debt sustainability—might not be appropriate to mitigate effectively cyclical fluctuations and to stimulate economic growth. The recent empirical evidence on the determinants of potential output—i.e. the origin of cyclical fluctuations— leads to a higher uncertainty on potential output measurement. Moreover the existing methods to estimate potential output present some weaknesses reducing reliability of the estimation results. Focusing on European case, the measure of potential output is considered as an useful guidance for policy. In particular, Stability and Growth Pact and Treaty on Stability, Coordination and Governance in the Economic and Monetary Union refer to the concepts of potential output, output gap and structural budget balance. Recently academics and some policy makers have criticized these measures and the related austerity policy because they worsened the economic situation. According to recent theoretical and empirical contributions it is important to rethink at the role of fiscal policy, focusing on fiscal stimulus and in particular on additional infrastructure spending because it can positively affect GDP as well as potential output. A part of this literature discusses extensively how public capital affects the economy. Under certain conditions such as a good institutional framework and sound projects, a higher spending on public infrastructure has a high economic impact. Keywords Potential Output, Cyclical Fluctuations, Persistence, Policy Implications, Additional Infrastructure Spending
... This finding, however, does not necessarily imply that the association between economic globalization and disposable income inequality is weakened by social spending. For example, generous unemployment benefits might worsen inequality if they lead to longer unemployment durations, such that it takes longer for laid off workers to find new jobs (Ball, 2009;Blanchard & Summers, 1986;Keane & Wolpin, 1997). Our findings suggest that using a bigger sample than previous studies (allowing us to control for unobserved country heterogeneity using country fixed effects) and comparable Gini coefficients tends to shift the results of previous research toward no evidence of a moderating ("cushioning") effect. ...
Article
This paper examines whether social spending cushions the effect of globalization on within‐country inequality. Using information on disposable and market income inequality and data on overall social spending, and health and education spending from the ILO and the World Bank/WHO, we analyze whether social spending moderates the association between economic globalization and inequality. The results confirm that economic globalization—especially economic flows—associates with higher income inequality, an effect driven by non‐OECD countries. Health spending is strongly associated with lower inequality, but we find no robust evidence that any kind of social spending negatively moderates the association between economic globalization and inequality.
... Procyclical investment could increase the capital stock; plentiful job opportunities could increase workers' attachment to the labor force; and so on. Ball, Mankiw, and Nordhaus (1999) and Ball (2009) provide evidence that hysteresis in the unemployment rate also works in good times; in the United Kingdom, for example, economic booms in the late 1980s and 1990s reduced the natural rate of unemployment. Today, a strong expansion could push employment and potential output back toward their pre-crisis paths. ...
Article
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Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.
... Numerous studies since the global financial crisis find that the long-term costs of recessions are larger than traditionally assumed, suggesting hysteresis. See Ball 2009 and2014;Erceg and Levin 2014;Blanchard, Cerutti, and Summers 2015;Martin, Munyan, and Wilson 2015;Fatás and Summers 2017;and Yagan 2018. More recently, a number of studies explore how economic booms affect labor market outcomes of various demographic groups, finding some evidence of positive hysteresis. ...
... Hysteresis could also be caused by obsolesce of knowledge and skills as a result of economic downturns. This happens when people are inactive for a long period of time and qualitative mismatches increase (Ball, 2009). During unemployment, human capital depreciates, as it is difficult to maintain and update relevant knowledge and skills when out of work (Ljungqvist and Sargent, 1998). ...
... A central building block of the modern consensus view was that there is no meaningful trade-off between inflation and unemployment -attempting to raise demand beyond potential will produce at best small and transitory increases in output and employment, while permanently raising inflation. In a world with hysteresis, the opposite is true: raising demand above (current or short-run) potential will produce only temporary inflation, until supply catches up, but it will produce permanent gains in output (Ball 2009). In this case there is no avoiding the trade-off between the policy goals of price stability and maximum employment and output. ...
... Ultimately, the latter reduces tax receipts and leads to government deficits that require for further debt expansion or austerity measures and hence, the vicious downward spiral continues. 13 11 As structural unemployment increases significantly in economic downturns (Michaillat, 2012), fiscal austerity (Bagaria et al., 2012) and disinflation (Ball, 2009) during recession become the worst policy options with regard to employment levels. 12 During times of turbulence and perceived risk increases, investors are attracted by assets where they are least likely to experience a loss of principal. ...
... Blanchard famously questioned the almost universally accepted 2% target of inflation as too low and brought 4% as target inflation rate into the discussion. Ball (2009) analyzed the impact of recessions for US data, finding for a lower growth trend after recessions. Schettkat (2015) In "natural rate theory," utility and profit maximization in competitive, perfect markets lead to an optimal equilibrium at which the economy settles. ...
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Germany's "stability-oriented" economic policies center around a balanced budget (the Black Zero, die Schwarze Null), and high net export surpluses claimed to be the only sustainable path to stable economic growth. Therefore, it probably comes as a surprise that Germany suffered from more recession than the US, the UK, and France over the last six decades. Germany's economic policy approach is more like balancing on a knife's edge, always in danger to slip into a slump. This paper provides evidence (1) that trend growth after recessions is almost always lower than the pre-recession trend, (2) that Germany experienced more recessions than the US, the UK or France over a 6-decades period and that Germany's overall GDP growth was next to the UK but lower than that of France and the US. (3) The costs of recessions are enormous, both when evaluated against trends but also when compared to pre-recession GDP. Hesitant economic policy focusing on price-stability, consolidate budgets too early causes very high losses.
... In particular, this aggregate includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and United Kingdom. 5 The NAWRU is often mistakenly associated to Friedman's (1968) natural unemployment rate (Ball 2009). Actually, these two concepts are quite different, since the natural unemployment rate is a market clearing notion which implies no involuntary unemployment on the labour market, while the NAWRU corresponds to an inefficient solutioncharacterized by involuntary unemploymentdue to the presence of institutional factors and imperfections that introduce rigidities in the market. ...
Article
Since the Maastricht Treaty, increasingly complex fiscal rules have been progressively introduced aimed at closely regulating and deeply affecting the budgetary policies of all signatory countries. One of the main reforms, enacted since 2005, has been to interpret national budget balances in structural terms, forcing each member state to comply with a Medium-Term Objective (MTO) based on the general principle of a zero-structural budget balance. Starting from the standard European Commission methodology for calculating the structural budget, our paper shows that, by replacing the estimate of the potential output based on the NAWRU with a different notion and measure of potential output, the results in terms of fiscal policy space are significantly different. This outcome points out the distinct possibility that the actual fiscal policies of the member states of the EU may be driven and constrained by a measure that seriously limits their flexibility by several percentage points. While our empirical calculations refer to Italy, the point we address is general and relates to all member states, particularly those that in the past have been forced to restrictive policies while in recession.
... When the economy starts to recover, those who lose their jobs are less productive, thus reducing overall productivity (Dosi et al. 2018). According to Ball (2009), the first viewpoint does not explain strongly unemployment hysteresis but there is more evidence to the second one. This means that the long-term employed detached from the labor market and this situation explain more strongly hysteresis effect in unemployment. ...
Chapter
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“Natural rate theory” points out deviations from the unemployment rateare temporary and back to the former level in the long run. However, the long-term persistence of unemployment rates at high levels could not be explainedby the standard natural rate theory. For this reason, the hysteresis hypothesiswas developed. The concept of hysteresis is based on the view that the valueof a variable in the current period depends on its values in the past period.From this point of view, unemployment hysteresis can be defined asunemployment rates that do not return to their former levels after any shockin the economy and progress on an ever-increasing path. Unemploymenthysteresis is described by insider-outsider models and duration theory.According to insider-outsider models, reasons for the unemploymenthysteresis are market regulations and rigidities. Duration theory is based onthe diminishing or deteriorating abilities of individuals during periods ofunemployment and the resulting job losses. Countries should follow policiesthat are long-term and structurally oriented when the hysteresis hypothesis isaccepted; If the natural rate hypothesis is accepted, it should have a short-termand cyclical structure. However, rapid advances in technology necessitate newstructural policy measures in all countries. The success of structural policiesdepends on the development of different heterogeneous policies for theworkforce at all levels by defining the differences in the labor market verywell.
... Lack of information on the adequacy of fiscal measures undertaken in the COVID-19 crisis and its long-term adverse effects on economic growth and labor market outcomes has raised debates about the impact of fiscal austerity and fears of slower recovery from the ongoing economic downturn. 48 the last recession in 2008 increased rates of long-term unemployment (Kroft et al., 2014), which plays a crucial role in the presence of hysteresis (Bell, 2009). The human capital of the unemployed decreases over time, possibly to the level under the reservation wage (Blanchard, 1991), making long-term unemployed workers unattractive to employers. ...
Article
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Lack of information on the adequacy of fiscal measures undertaken in the COVID-19 crisis and its long-term adverse effects on economic growth and labor market outcomes has raised debates about the impact of fiscal austerity and fears of slower recovery from the ongoing economic downturn. This paper analyzes the short and long-term effects of the fiscal policy measures undertaken in the COVID-19 crisis in the EU-27. For the short-term estimation, we use Okun’s law. To examine the long-run effects, we use the concept of potential output using a production function approach. The findings from this paper are that in the short-term, fiscal measures were generally effective. In the long-term, the COVID-19 crisis would have had a negative and permanent effect on the potential GDP growth if the policymakers had undertaken no fiscal measures.
... Procyclical investment could increase the capital stock; plentiful job opportunities could increase workers' attachment to the labor force; and so on. Ball, Mankiw, and Nordhaus (1999) and Ball (2009) provide evidence that hysteresis in the unemployment rate also works in good times; in the United Kingdom, for example, economic booms in the late 1980s and 1990s reduced the natural rate of unemployment. Today, a strong expansion could push employment and potential output back toward their pre-crisis paths. ...
... 70 Another possibility is to assume in the model that demand-supply interactions are stronger in cases of negative demand shocks than in those of positive ones. This assumption would be in line with some empirical evidence (Ball, 2009) and would help the model produce larger long-run real effects in response to small negative monetary shocks, but it would not lead to different predictions concerning the asymmetry of short-run real effects. ...
Article
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This paper studies the long-run effects of monetary policy on real economic activity. It presents a hybrid menu cost model, the structure of which mimics that of dynamic stochastic general equilibrium models with fixed price adjustment costs (menu costs). It contains two mechanisms capable of generating long-run real effects in response to monetary shocks according to post-Keynesian macroeconomists, and its behavior is studied via agent-based simulations. After being calibrated to reproduce key features of the microdata, the model estimates that a typical monetary shock has substantial long-run real effects, with around one-quarter of the shock being absorbed by real output. However, the long-run effectiveness of a monetary shock turns out to decrease with its size. The key mechanisms generating long-run real effects are shown to be demand–supply interactions, that is, positive feedbacks from aggregate demand to aggregate supply. The results suggest that central banks should stronger emphasize stabilizing real economic activity when designing their monetary policies.
... Farmer et al. (2013) argue that most stock market movements are due to "animal spirits." 7 See Blanchard et al. (2015) and Ball (2009) for recent empirical evidence of hysteresis in output and unemployment. 8 The multiplicity of steady-state equilibria is the key difference between the model in this paper and the previous generation of endogenous business cycles models such as Farmer and Guo (1994), Benhabib and Farmer (1994) and, more recently, Nishimura et al. (2013) and Dufourt et al. (2016), among others. ...
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This paper develops a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents’ wealth decreases, for either fundamental (productivity) or non‐fundamental (sunspot) reasons, the unemployment rate can increase for a potentially indefinite period. This makes the unemployment rate dynamics path dependent.
... No obstante, estos déficits fiscales no están dirigidos a lograr los objetivos definidos por cualquier estrategia de GND, sino que han sido motivados por la necesidad de evitar 9 ÍNDICE PORTADA 2 ELEMENTOS PARA UN GREEN NEW DEAL los efectos de histéresis provocados por un shock externo y común; para mantener el vínculo entre empleado y empleador y evitar que se cierren el mayor número posible de empresas, minimizando el contagio económico y financiero de la crisis económica que deja cicatrices persistentes (Ball, 2009;Gourinchas, 2020). Debe hacerse hincapié que para la adhesión de los organismos internacionales y gobiernos a la retórica del GND ni siquiera es necesario compartir el contexto favorable a la política fiscal que se abre con el ZLB. ...
... Labor market rigidities such as decreased demand for employees may also cause hysteresis along with high rates of business foreclosures. Ball (2009) studied unemployment hysteresis in twenty developed countries, ranging from Western Europe, North America and the Antipodes, and Japan, and found that involuntary unemployment persisted despite policies to stimulate recovery and job generation. Hershbein and Stuart (2020) studied five national recessions in the U.S. (1973 -1975; 1980 -1982; 1990 -1991; 2001; 2007 -2009) and identified permanent declines in employment rates and economic activity after recessions. ...
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As COVID-19 spread across the world in 2020, economic activities have been impacted, and unemployment has risen across many countries. The consequences have been particularly harmful to vulnerable populations such as women, racial minorities, or part-time workers. While many governments enacted employment and income support policies as a response to this economic crisis, there has been a lack of comparative and evaluative reviews of the policies. In this study, we contextualize some employment and income support policies during the early phases of COVID-19 from the U.S., Denmark, and Taiwan, aiming to enhance the understanding of such policies. We found that the U.S., being more aligned with a liberal welfare state regime, relied on more market mechanisms to address labor and employment issues. Denmark and Taiwan, being more aligned with a social-democratic welfare state, enacted more interventions in and redistributions outside of the market preventing furloughs, layoffs and mass unemployment. The human costs of unemployment and labor market hysteresis are addressed in light of these two different approaches and outcomes.
... According to data availability, we focus on 25 advanced economies for the period 1983-2016. A detailed list of countries in our sample can be found in Appendix 4. Notably, the selection of countries is also in line with the current literature on hysteresis, which principally involves mature economies (Ball, 2009(Ball, , 2014Blanchard et al., 2015;Girardi et al., 2020). ...
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The paper critically examines the New Keynesian explanation of hysteresis based on the role of long-term unemployment. We first examine its analytical foundations, according to which rehiring long-term unemployed individuals would not be possible without accelerating inflation. Then we empirically assess its validity along two lines of inquiry. First, we investigate the reversibility of long-term unemployment. Then we focus on episodes of sustained long-term unemployment reductions to check for inflationary effects. Specifically, in a panel of 25 OECD countries (from 1983 to 2016), we verify by means of local projections whether they are associated with inflationary pressures in a subsequent five-year window. Two main results emerge: i) the evolution of the long-term unemployment rate is almost completely synchronous with the dynamics of the total unemployment rate, both during downswings and upswings; ii) we do not find indications of accelerating or persistently higher inflation during and after episodes of strong declines in the longterm unemployment rate, even when they occur in country-years in which the actual unemployment rate was estimated to be below a conventionally estimated Non-Accelerating Inflation Rate of Unemployment (NAIRU). Our results call into question the role of long-term unemployment in causing hysteresis and provide support to policy implications that are at variance with the conventional wisdom that regards the NAIRU as an inflationary barrier.
... Buoyant aggregate demand, for instance, may raise productivity dynamics via the Kaldor-Verdoon effect, thus reducing the NAIRU and increasing potential GDP (Storm, 2017;Storm and Naastepad, 2015b). 3 In this context, the NAIRU may thus change endogeneously due to demand-related factors (Ball, 2009;Stockhammer, 2004;Stockhammer and Kl€ ar, 2011), and may be path-dependent with respect to actual unemployment (Ball, 2009). 4 Potential GDP is a theoretical construct that cannot be directly observed from available economic data. ...
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In this paper, we analyse secular stagnation in the eurozone. We adopt a core-periphery perspective and analyse whether the 2007–2008 financial crisis triggered off diverging dynamics in the growth potential of core and peripheral eurozone countries. We find that secular stagnation affects the whole eurozone but is a much more serious concern in the periphery. Among the components of potential GDP, the NAIRU in particular has diverged since 2008. We find that the increase in the NAIRU is strongly related to demand-side factors such as investment demand and the fiscal policy stance, as well as to the technological level of the economy. Labour market institutions seem to play a relatively minor role, which may also change depending on the level of technological development of an economy. In line with these findings, we argue that reforms in the eurozone should focus on levelling out the core-periphery technological gap via industrial policy, and on the creation of homogenous financial and macroeconomic conditions among member countries, rather than on the generalized deregulation of labour markets.
... Several papers have analysed stochastic dynamics of unemployment series, and most of these papers have applied traditional time-series, nonlinear parametric models and panel data unit root test techniques. For instance, Akdo gan (2017), Ball (2009Ball ( , 2014, Chang (2011Chang ( ), F eve et al. (1999, Fosten andGhoshray (2011), Furuoka (2017), Marques et al. (2017), and Røed (1996Røed ( , 2002 have concluded that the hysteresis hypothesis is valid in unemployment series. Cheng et al. (2012) find significant hysteresis in the states of the United States. ...
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In this paper, we test the validity of the employment hysteresis hypothesis. For this purpose, we use daily employment data at the national and state levels in the United States from January 8, 2020, to May 30, 2020. We apply the modified version of the Kapetanios-Shin unit root test, along with finite-sample critical values. We find that the employment hysteresis hypothesis is valid in the United States during the COVID-19 era. The validity of the findings does not change when data at the national and state levels are used. The evidence is also valid when the employment levels for all firms and small firms are considered. The results are also robust to employment levels for workers at different income levels and employment in five different sectors.
... Gordon (2011) shows Equation (2) can be interpreted not only by adaptive expectations but also by inertia (due to sticky prices, lengthy contracts, and also input-output supply chains), which is also compatible with rational expectations. Equation 3 represents a simplified version of the accelerationist Phillips curve (Taylor, 2000;Ball, 2009). ...
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