Hysteresis in Unemployment: Old and New Evidence

Laurence M. Ball

NBER Working Paper No. 14818
Issued in March 2009
NBER Program(s):   EFG   ME

This paper argues that hysteresis helps explain the long-run behavior of unemployment. The natural rate of unemployment is influenced by the path of actual unemployment, and hence by shifts in aggregate demand. I review past evidence for hysteresis effects and present new evidence for 20 developed countries. A central finding is that large increases in the natural rate are associated with disinflations, and large decreases with run-ups in inflation. These facts are consistent with hysteresis theories and inconsistent with theories in which the natural rate is independent of aggregate demand.

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Acknowledgments

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