Question

Hysteresis and the Labor Force Participation Rate. In economics the term "hysteresis" means that the history of the economy has a lingering effect on current economic performance. During the U.S. recession starting in 2007, the labor force participation rate continued to remain below the levels that prevailed before the recession. Could this be an example of hysteresis? Can you suggest any other explanations?

Answer 1

Yes, this can be an example of hysteresis since the total participation in the labor force continued to be lower because many people who left the labor force during the recession didn't even try to return (i.e. didn't even bother to look for a job). The problem with measuring employment is what happens to those that just quit looking for job. They are no longer considered unemployed, but they are in desperate need for a job.

Another explanation could be that many baby boomers reached retirement age, which reduces the total labor force participation.

Also another explanation could be that very young people may perceive that it is too difficult to find a job, so they do not even try to get their first job. That means that they postpone their entry to the labor force.