Concept of hysteresis in economy


  • Concept of hysteresis in economy

    Posted by Encyclios on April 3, 2023 at 3:01 PM

    Some economic systems exhibit hysteresis. For example, in order to begin exporting, firms incur sunk costs, i.e., costs that, once incurred, are no longer taken into account in assessing the profitability of exporting, thus creating hysteresis in firm behavior.

    In economics, hysteresis is the inability of the unemployment rate to return to its initial level after an adverse shock, even after the shock has passed. It is basically due to four main reasons: the “insider-outsider” (i.e., the participation of those already employed in labor negotiations in order to keep their jobs); the “discouraged workers” (i.e., individuals who stop looking for work after a period of time without results); the “search and mismatch” (the habit of workers and entrepreneurs to have poor results in the search for employment/employment); the “capital stock” (i.e., the low investment caused by the shock that leads to a low level of capital movements).

    The phenomenon of hysteresis can also be explained using the “efficiency wage theory”.

    Encyclios replied 2 months ago 1 Member · 0 Replies
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