Explain why some economists claim that the persistence of high unemployment rates during the recovery from the recession of 2007–2009 is evidence of "hysteresis."

Question

What will be an ideal response?

Answer 1

Some economists believe that large negative shifts in aggregate demand actually reduce the full employment level of output, in a process known as hysteresis. This breakdown occurs because if high rates of unemployment persist, more workers lose their skills—or are viewed by employers as lacking current skills—and therefore have difficulty being rehired. Furthermore, workers
who are unemployed for long periods may become discouraged and drop out of the labor force permanently. These obstacles to locating new jobs lead to chronic levels of higher unemployment and lower levels of output.