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Hysteresis in Labor Markets? Evidence from Professional Long-Term Forecasts

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  • John C Bluedorn
  • Daniel Leigh

Abstract

We explore the long-term impact of economic booms on labor market outcomes using a novel approach based on revisions to professional forecasts over the past 30 years for 34 advanced economies. We find that when employment rises unexpectedly, forecasters typically raise their long-term forecasts of employment by more than one-for-one and also expect a strong rise in labor force participation, suggesting more persistent effects than is traditionally assumed. Economic booms associated with changes in aggregate demand, when inflation is rising and unemployment falling unexpectedly, also come with persistent long-term effects on expected employment and labor force participation, suggesting positive hysteresis. Our forecast evaluation tests indicate that forecasters are, on average, unbiased in their assessment of these positive, persistent effects.

Suggested Citation

  • John C Bluedorn & Daniel Leigh, 2019. "Hysteresis in Labor Markets? Evidence from Professional Long-Term Forecasts," IMF Working Papers 19/114, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:19/114
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    Keywords

    Human capital; Labor force; Labor force participation; Labor markets; Demand; Hysteresis; business cycles; monetary policy.; forecaster; WEO; forecast error; forecast; aggregate demand;

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