What is ‘Hysteresis’ in Economics?

  • Hysteresis occurs when unemployed persons are unwilling to accept lower wage rates as a means of returning to work.
  • Wage stickiness implied by hysteresis can produce an increase in the “normal” unemployment rate, also known as the non-accelerating inflation rate of unemployment (NAIRU), which defies the notion of cyclical, or self-adjusting, unemployment.
  • If, for example, jobs are outsourced to lower-wage economies, workers of the home economy may over time become unqualified to take on those jobs should they return or become dependent on government welfare benefits.

What is the ‘Non-Accelerating Inflation Rate Of Unemployment – NAIRU’

  • The non-accelerating inflation rate of unemployment (Nairu) – also referred to as the long-run Phillips curve – is the specific level of unemployment that is evident in an economy that does not cause inflation to rise up. NAIRU often represents equilibrium between the state of the economy and the labor market.

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