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Hysteresis in Employment among Disadvantaged Workers

System Working Paper 18-08 | Published March 19, 2018

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Authors

Bruce Fallick Federal Reserve Bank of Cleveland

Pawel Krolikowski Federal Reserve Bank of Cleveland

Hysteresis in Employment among Disadvantaged Workers

Abstract

We examine hysteresis in employment-to-population ratios among less-educated men using state-level data. Results from dynamic panel regressions indicate a moderate degree of hysteresis: The effects of past employment rates on subsequent employment rates can be substantial but essentially dissipate within three years. This finding is robust to a number of variations. We find no substantial asymmetry in the persistence of high vs. low employment rates. The cumulative effect of hysteresis in the business cycle surrounding the 2001 recession was mildly positive, while the effect in the cycle surrounding the 2008–09 recession was, through 2016, decidedly negative. Additional simulations suggest that the employment benefits of temporarily running a “high-pressure” economy are small.