Hysteresis (his-tuh-REE-sis) is an obscure word for an important concept.
Here’s a wonderfully clear explanation from Richard Baldwin, in a column for VoxEU:
Technically, the two types of dynamics are called non-hysteretic (rubber band) and hysteretic (paper clip).
The concept of hysteresis can be applied to all sort of fields — physics, medicine and, of course, economics. As big as the impact of the lockdown is on the economy right now, what should concern us most are the potentially permanent impacts.
Take jobs, for instance. The 2008-09 recession was a bad one. However, what followed was a ‘jobs-led recovery’. Indeed, as employment bounced back fast, some people called it a ‘jobs miracle’. Wage restraint limited job losses in the first place and aided recruitment later on.
However, this time is different. The lockdown recession has left many employers not with reduced income, but no income — giving them with no option but to lay-off workers.
And that’s where hysteresis comes in. As Baldwin puts it, “a firm’s decision to hire a worker is very different than its decision to retain a worker”. Assuming a sufficiently strong recovery, retention is the default option if a company’s workforce is largely intact and available. However, if it isn’t, then re-hiring is just one option among many. Others might include downsizing the business, investing in automation or offshoring at least some of the jobs.
Hysteretic effects can build on one another. An economy-wide shift to less labour-intensive business models means a higher level of structural unemployment. That, in turn, lowers consumer demand and thus job creation. Furthermore, extended periods without work have hysteretic effects on individuals by eroding their skills, professional relationships and morale.
That’s why interventions like the furlough scheme are so important. It’s not just about helping business hold on to key employees — it’s also about stopping the scarring effects of long-term worklessness.
Of course, many workers have been made redundant despite the scheme. Many other jobs will be lost as businesses struggle, but fail, to recover. Then there’s the massive fall in recruitment, and the impact that has on those looking for a new job or a first job.
Hence, the case for government-led job creation schemes. According to a report in The Times, Rishi Sunak is on the case. The Chancellor is, we’re told, preparing an emergency budget focusing on support for green jobs. The energy sector is mentioned, but I hope that conservation work — like tree-planting — also features.