Hysteresis (economics)

The borrowed from physics and cybernetics term hysteresis (from Greek ὑστέρεσις hysteresis " lack, deficiency, retardation " ) called in economics a reaction to external influences, a system does not return to its original state when it decays. This simply means, the cause has been eliminated, the effect lasts yet further.

Whereas the Gabler economic lexicon and Franz relate to economic systems, the definition of Baßeler, Heinrich and Utecht is generally related to systems.

Hysteresis in the economy

The term hysteresis is used in various fields of science and technology, such as, for example, in physics for the analysis of magnetic fields. In addition, the economy relies on the term, so as to explain certain developments in the natural labor market and flexible exchange rates. From the hysteresis delineate the term persistence. Herein, after a short-term shock the old equilibrium, in contrast to the hysteresis, restores, but this may take some time.

Hysteresis in the labor market

For the labor market hysteresis means that high unemployment of the present, which has arisen due to exogenous shocks, even after the abolition of these shocks will not return. Rather, there is an increase in future natural unemployment.

One reason for this form of labor market hysteresis is the long-term unemployment. By continuing unemployment qualifications and work motivation will be lost and cause a decreased willingness to actively look for a new job. Many companies avoid hiring long-term unemployed. These therefore have no more influence on the process of wage formation. Long-term unemployed fall for the employer as leverage in salary negotiations away. The resulting partially inflated wage cause a shift in the natural rate of unemployment up.

Example: Hysteresis in the labor market

The oil price shock occurred in the 70s of the 20th century led to a sharp rise in unemployment in Europe. In the 80s of the 20th century, the price of oil has fallen sharply against it, yet the unemployment rate in these years continued to rise.

The cause (oil price shock ) no longer exists, although the effect (increased unemployment) will take on to.

Hysteresis in a flexible exchange rate

A Wechselkurshysterese occurs with flexible exchange rate when high market entry and market exit costs for businesses exist in export markets and thus they wait a long time if exchange rate changes until they enter the market or leave it. We always see the likelihood of a wrong decision, because the exchange rates at the next moment could change again. A correction of the decision is associated with high costs.

Example: Hysteresis in a flexible exchange rate

Due to an appreciation of the domestic currency, foreign companies are entering the market. In the following period, meanwhile, is written down to its initial level. However, the company left the market not because of market exit costs. In this case, a Wechselkurshysterese formed. After the initial appreciation is no longer present, the effect of higher imports has remained, however.