Hysteresis

Hysteresis: when the economy “remembers” what happened, and continues to show effects of what happened, even if the causal factors are long gone.

Put another way, hysteresis is when effects lag behind their causes, continuing to affect the economy.

For example, the unemployment rate is commonly used to explain hysteresis. The business cycle affects unemployment with its ups and downs. We’d expect that businesses would start hiring workers like hotcakes when the economy is on an expansionary upswing.

Yet, that’s not what happens. Hysteresis happens. There’s a lag, which can be explained by many factors. For instance, people might have gotten used to lower standards of living, or they took on new skills to help them survive during the hard times, which maybe aren’t the same skills the expansionary market is now hiring for (which happens, especially with advances in technology).

Hysteresis like this can have a really negative effect on the economy. How about let’s just all forget that recession ever happened...and get back to work, eh?