Labour Market Hysteresis
Hysteresis, Nigeria’s Monetary Policy and Unemployment in an Environment of Financial Dominance
2.0Theoretical and Empirical Literature Review
2.1 Conceptual Issues and Theoretical Literature Review
Despite the increased frequency in the use of term hysteresis in Literature, there seem to be no general consensus in the definition and implication of the term. However, a point of agreement is that hysteresis is a deviation from the principle of many macroeconomic doctrines which posit the existence of a constant “natural” rate of unemployment or a “nonaccelerating inflation” rate of unemployment at which inflation rate remains constant and the economy gradually moves towards.
The Natural rate hypothesis as pioneered by Phelps (1967) and Friedman
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The failure of these theories of a constant and mean reverting unemployment rate of unemployment to explain the higher rates of unemployment experienced in Europe led to alternative explanations. The most conspicuous in literature is the known as Labour-market hysteresis. Hysteresis proposes an alternative approach to explaining differences in unemployment. If the actual unemployment rate is influenced by aggregate demand, it follows that natural unemployment can also be influence by demand side …show more content…
(1991), who referred to hysteresis as a random walk with unit root in the unemployment rate. Hysteresis has also been described as non-linear process with multiple stable equilibria (Amable et al. (1995), Ljunqvist and Sargent (1998)). According to them, shocks to unemployment can have both short and long term effects. While some shocks are temporary, others are more permanent and lead the economy unto new equilibrium paths.
Several theoretical frameworks have been used to explain hysteresis in unemployment. Prominent among them is the Membership theory (Lindbeck and Snower, 1985; Blanchard and Summers, 1986). This theory proposes that Wages are determined by insiders in the firm and not by the unemployed outside the firm. The employment form is given as: 1
Where:
= employment in time , m = nominal money, em = expected nominal money.
Equation one indicates that current employment is a function of past employment plus an unexpected change in nominal money. This equation assumes that employment would follow a random walk (Blanchard and Summers, 1986). In summary, the hysteresis hypothesis explains the unemployment dynamics as a non-stationary or unit root process that is not mean
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