Hysteresis
The tendency of economic shocks to produce lasting effects — especially elevated unemployment — long after the original shock has passed.
What is Hysteresis?
Hysteresis in economics describes situations where a temporary shock causes effects that persist or become permanent even after the original cause has dissipated, because the shock alters the underlying structure of the economy. Labor market hysteresis is the most studied form: during a deep recession, unemployed workers suffer skill atrophy, loss of professional networks, and reduced employer confidence, leaving them less competitive after the recession ends and raising the structural unemployment rate durably. Hysteresis strengthens the case for aggressive countercyclical policy, because allowing prolonged unemployment can permanently raise the natural rate of unemployment. The concept was formalized for economics by Blanchard and Summers (1986) and is supported by empirical evidence from European recessions and the 2008 global financial crisis.
Example
Following the 2008 financial crisis, U.S. long-term unemployment (27+ weeks) peaked at 6.7 million in April 2010. Many workers permanently exited the labor force as their skills became obsolete, contributing to a sustained decline in the labor force participation rate from 66% in 2007 to 62.7% by 2015 — a persistent hysteresis effect.
Source: Blanchard, O. & Summers, L. — Hysteresis and the European Unemployment Problem (NBER 1986)