Working Paper: NBER ID: w2035
Authors: Olivier J. Blanchard; Lawrence H. Summers
Abstract: The recent European experience of high persistent unemployment has led to the development of theories of unemployment hysteresis embodying the idea that the equilibrium unemployment rate depends on the history of the actual unemployment rate. This paper summarizes two directions of research on hysteresis that appear especially promising. Membership theories are based on the distinction between insiders and outsiders and explore the idea that wage setting is largely determined by firms' incumbent workers rather than by the unemployed. Duration theories explore the idea that the long term unemployed exert much less downwards pressure on wages than do the short term unemployed.
Keywords: hysteresis; unemployment; wage setting; insiders; outsiders
JEL Codes: E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| historical unemployment rates (J64) | current equilibrium unemployment levels (J64) |
| actual unemployment (J64) | equilibrium unemployment rate (J64) |
| insider dynamics (C69) | wage setting (J38) |
| long-term unemployed individuals (J64) | downward pressure on wages (F66) |
| short-term unemployed individuals (J65) | downward pressure on wages (F66) |