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Unemployment: natural rate epicycles or hysteresis?

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  • Rod Cross

    ()
    (Department of Economics, University of Strathclyde)

Abstract

This paper argues that the natural rate of unemployment hypothesis, in which equilibrium unemployment is determined by “structural†variables alone, is wrong: it is both implausible and inconsistent with the evidence. Instead, equilibrium unemployment is haunted by hysteresis. The curious history of the natural rate hypothesis is considered, curious because the authors of the hypothesis thought hysteresis to be relevant. The various methods that have been used to model hysteresis in economic systems are outlined, including the Preisach model with its selective, erasable memory properties. The evidence regarding hysteresis effects on output and unemployment is then reviewed. The implications for macroeconomic policy, and for the macroeconomics profession, are discussed.

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File URL: http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2014/14-02.pdf
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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1402.

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Length: 21 pages
Date of creation: Feb 2014
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1402

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Keywords: Unemployment; Natural Rate Hypothesis; Hysteresis;

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  1. Farmer, Roger E A, 2013. "The Natural Rate Hypothesis: An idea past its sell-by-date," CEPR Discussion Papers 9580, C.E.P.R. Discussion Papers.
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  3. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
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  13. Cross, Rod, 1993. "On the Foundations of Hysteresis in Economic Systems," Economics and Philosophy, Cambridge University Press, vol. 9(01), pages 53-74, April.
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  16. Rod Cross & Julia Darby & Jonathan Ireland & Laura Piscitelli, 1999. "Hysteresis and Unemployment: a Preliminary Investigation," Computing in Economics and Finance 1999 721, Society for Computational Economics.
  17. Donald Katzner, 1999. "Hysteresis and the Modeling of Economic Phenomena," Review of Political Economy, Taylor & Francis Journals, vol. 11(2), pages 171-181.
  18. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
  19. Rod Cross & Dany Lang, 2011. "The NAIRU: Still 'Not An Interesting Rate of Unemployment'," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 8(2), pages 317-340.
  20. Laurence Ball, 1999. "Aggregate demand and Long-Run Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 189-252.
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  23. Rowthorn, Robert, 1995. "Capital Formation and Unemployment," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 26-39, Spring.
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