On Hysteresis Hysterics

May 14, 2012Mike Konczal

Dean Baker and Kevin Hassett have a great editorial in the weekend's New York Times, "The Human Disaster of Unemployment." They correctly identlfy the many long-term psychological and social problems of periods of mass unemployment for people, families, communities, and ultimately our nation. As is the nature of editorials written by people with cross-ideological committments, the solutions are a bit off, but this weakness is also part of the issue with discussing the urgency of unemployment because of "hysteresis."

Imagine having a fever so bad that it permanently raised your body temperature. Now imagine a period of unemployment so bad that it permanently reduces our economy's ability to produce things and employ people. That's hysteresis -- the long-term scarring of our economy from periods of short-term unemployment. I've discussed this before, and I think the evidence is very convincing it is a major issue. Hysteresis is part of the engine in the recent Brad Delong/Larry Summers paper arguing for self-sustaining stimulus.

Crucially, hysteresis is an intellectual challenge to the so-called structuralists who would argue that we should ignore the short-term economy and just focus on the long-run health of the economy. Beyond us all being dead in the long run, the long run is just a series of short runs right after each other. And hysteresis shows that short-run problems can perpetuate themselves and become embedded in the long-run economy.

Where I become ambivalent about the focus on hysteresis is that it too quickly presumes that special policy is required to combat it. Instead of a weak economy and poor job growth, suddenly hysteresis calls for the assumption that jobs are available and that the long-term unemployed, for whatever individual reasons, can't take them. I think the easiest way to fight hysteresis is just to have a lot of jobs available through strong demand, and employers will be perfectly incentivized to train workers however they need to as they look to expand their workforce. But others would take their eye off the ball of full employment and try to focus on just the long-term unemployed policy-wise, through such things as special job training programs.

Is there data we can use to test this theory one way or the other? I was able to get the people in charge of the flows data at the BLS to send me an update of one of my favorite data sets, flows from unemployment to employment by duration of unemployment. We've talked about this data last year here and here, and now I have it updated through April 2012. The longer you've been unemployed, the less likely it is that you'll find a job over the course of a month.  But how has this changed during the Great Recession and the aftermath?

Thesis: if hysteresis is problematic in that the long-term unemployed have become detached from the labor force in such a way that it requires policy intervention beyond creating jobs - like special job training programs - then we'll see that people who have only been unemployed a short time (low duration) find jobs easiers than a year ago. But we will also see that those that have been unemployed a longer-time will not show any increase in their job finding rate, and maybe their rate of finding a job has even decreased. The unemployed parts of the economy will be bifurcating into a healthy short-term section and a dislodged long-term section.

I'm plotting the chance of the unemployed for the average of the first four months of 2007, 2011 and 2012 each (the data is seasonally unadjusted) by duration of unemployment. How did the last year look?

The purple line for 2012 is pulling away from 2011 across the entire unemployment spectrum. The chances of finding a job are increasing for all unemployment spell lengths, though they aren't anywhere near 2007 levels. Meanwhile, here's a graph of the six month moving average of each duration bucket going back 9 years:

The entire job market is weaker, even for those who have only been unemployed for a few weeks. Though the suffering the long-term unemployed are going through is real, the best policy for them is providing anti-poverty relief through cash and services while pushing on expansionary fiscal, monetary and debt-relief policies to get the economy back on track.

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