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Q: labor market ( Answered 5 out of 5 stars,   1 Comment )
Question  
Subject: labor market
Category: Business and Money > Economics
Asked by: armei-ga
List Price: $50.00
Posted: 06 Nov 2002 09:57 PST
Expires: 06 Dec 2002 09:57 PST
Question ID: 100456
Can you give me some information on hysteresis? What are the
‘hysteresis effects’ in labor markets? Where and when did this term
originate? Can you give me a few examples of studies that look at this
effect and what their conclusions were?   Thanks!
Answer  
Subject: Re: labor market
Answered By: watershed-ga on 06 Nov 2002 11:48 PST
Rated:5 out of 5 stars
 
Hello Armei,

Thanks for your question.

According to Webster’s, hysteresis is defined as:

Hysteresis \Hys`te*re"sis\, n. [NL., fr. Gr. ? to be behind, to
     lag.] (Physics)
     A lagging or retardation of the effect, when the forces
     acting upon a body are changed, as if from velocity or
     internal friction; a temporary resistance to change from a
     condition previously induced, observed in magnetism,
     thermoelectricity, etc., on reversal of polarity.

(www.dict.org)

After doing some research, it appears that this term is a part of
economic theory, much of which is above my current understanding.  It
seems however that hysteresis effects are temporary shocks to a labor
market which can have a lasting, long-term impact upon it.  It seems
that most instances of this can be divided into a few categories.

A. A sudden, unforeseen variable, such as a temporary rise in
unemployment
B. Interaction with a foreign variable, such as the interactions
between foreign markets.
C. Divergent behavior of a known variable, such as labor market
insiders doing something unforeseen

Most of the research I have found appears to relate to the hysteresis
effects of unemployment.  The theory of hysteresis seems to try to
establish that to properly analyze a particular model, one needs to be
aware of the complete history of the variables in that model to really
be able predict the long term actions of it.  As an analogy, imagine 6
spheres, all evenly spaced from each other, rotating in a perfect,
endless circle.  Suddenly, a tiny sphere comes out of nowhere and hits
one of the spheres, knocking it slightly out of place.  The sphere
that was struck is still moving in that circle, but its course and
speed has changed just a tiny bit.  This change may not be directly
noticeable without very specific measurement, and you would not know
to measure if you never thought that tiny spheres could affect the
larger ones in such a way. That really seems to be the gist of it. I
think the hysteresis theory was pushed forward because of the weakness
of current economic theory in predicting things, like unemployment. 
Hysteresis theory attempts to explain how a fast moving system can
effect a slower one over time.

The origin of the word hysteresis is as follows:

"The word hysteresis is of the Greek origin and means etymologically
`coming behind'. It was introduced into the scientific vocabulary
about 120 years ago by the Scottish physicist, Alfred Ewing, as
follows. ``When there are two quantities  M and N, such that cyclic
variations of N cause cyclic variation of M, then if the changes of M
lag behind those of N, we may say that there is hysteresis in the
relation of M and N."

(http://www.physics.ucc.ie/~oll/hysteresis/node3.htm)

The earliest reference I can find to hysteresis effects in labor
markets is by a Professor Friedman, whom advanced his ideas about it
in 1968.  Unfortunately, I was only able to find an obscure reference
to this which did not even mention the title of the paper.  The word
hysteresis is used in a variety of fields, from Teflon manufacturing
to quantum physics.  Here are some research studies I have found about
Hysteresis effects.  As you can see from the titles, this is not
exactly light reading:


Hysteresis in an Evolutionary Labor Market
http://econwpa.wustl.edu:8089/eps/comp/papers/0004/0004003.pdf

Qualitative Aspects and Economic Applications of Hysteresis Modeling 
http://216.239.33.100/search?q=cache:M24729Nqix8C:www.zib.de/amcw01/tex/minis/MS016.ps+hysteresis+effects+%22labor+market%22&hl=en&ie=UTF-8

History Dependence and Hysteresis Effects in an Investment Model with
Adjustment Costs
http://www.wiwi.uni-bielefeld.de/~semmler/cem/wp/no_32.pdf

Monetary Policy, Multiple Equilibria, and Hysteresis Effect on the
Labor Market
http://www.wiwi.uni-bielefeld.de/~semmler/cem/wp/no_15.pdf

Unemployment Persistence: The Hysteresis Assumption Revisited
http://eurequa.univ-paris1.fr/membres/karame/Hysteresis2.PDF

Some scientific information about hysteresis if you're interested:

Hysteresis Modeling 
http://www.ece.drexel.edu/faculty/friedman/MMGroup/WebPages/Hysteresis%20Modeling.htm

What's Hysteresis?
http://www.lassp.cornell.edu/sethna/hysteresis/WhatIsHysteresis.html

It seems that the main conclusion of these reports is that Hysteresis
effects do exist, and it should be a known factor in economic models. 
That more research needs to be done is also a definite conclusion.  It
seems like a vastly complicated subject that is really still in its
infancy, as far as the economic side of it goes.  I hope this helps.

Best Regards,

watershed-ga

Request for Answer Clarification by armei-ga on 08 Nov 2002 06:39 PST
Hi watershed,

   Can you tell me how does the discovery of Hysteresis effect in
labor market undermine the New Classical position of policy
ineffectiveness, i.e., that fiscal policy is ineffective in changing
the macroeconomic unemployment situation?  Thanks!

Best,

Armei

Clarification of Answer by watershed-ga on 08 Nov 2002 11:28 PST
Hello Armei,

Well, after doing some research I have come up with a few sites that
seem to answer your question.  From what I can gather, there seem to
be two schools of thought, New Classical and New Keynesian.  Keynesian
has hysteresis effects as part of its theory, and the other does not. 
It seems that acceptance of hysteresis only applies to the theory in
general and really hasn't made any inroads in making the other side
believe anything, one way or the other.  From reading all of this
information, it seems like there is a lot of turmoil among economic
theorists.  No one seems to be able to decide one way or the other
what is really going on because neither sides theory has all the
puzzle pieces.  These articles I have found make broad comparisons of
two theories so I hope you will find your answer within them.  Hope
this helps.

Ugly Currents in Modern Economics
http://www.irpp.org/po/archive/sep97/blaug.pdf

Full Employment and Inflation:  Where We Stand and Where We Can Go
financialservices.house.gov/banking/72397re.htm

Macroeconomic Schools of Thought 
http://www.maths.tcd.ie/local/JUNK/econrev/ser/html/schools.html

How would New Keynesians respond to the New Classical Views? 
http://www.personal.rdg.ac.uk/~les00da/essay10.doc

The transmission mechanism of monetary policy
http://homepages.uel.ac.uk/K.Bain/transmech2.pdf

Monetarists, New Classical Economists, Real Business Cycle theorists 
http://econweb.rutgers.edu/karmakar/SummaryofChs11and12.htm

MARKET FAILURES: MACROECONOMIC ASPECTS
http://homepages.uel.ac.uk/K.Bain/stabpol.html

Search Term Used: "New Classical" "policy ineffectiveness" hysteresis
Search Method: www.google.com


Best Regards,

watershed-ga
armei-ga rated this answer:5 out of 5 stars
It is helpful, thank you!

Comments  
Subject: Re: labor market
From: neilzero-ga on 06 Nov 2002 17:18 PST
 
Let's try a seanario. A factory in a small town lays off some
employees. Some of the long term unemployed and some of the layed off
workers take jobs in other towns and cities, returning the
unemployment rate half way back to the former rate. The long term
unemployed go elsewhere as they dispare of finding a local job, as the
competion increased due to the lay off. Now the factory calls back the
workers, plus desires a new high in employee count, but the human
resources department quickly finds it is scraping the bottom of the
barrel in the small town, and is still short several employees. They
will have to recruit from out of town or hire unqualified workers with
bad work habits. Before the lay off they could easily have filled the
modest expansion from long term unemployed workers. It may take a year
(hysteresis) for the unemployment rate to return to the pre layoff
level, even though the factory recruited from out of town double the
number that they expanded by.  Neil

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