Causes and Consequences of Hysteresis: Aggregate Demand, Productivity and Employment

Abstract

In this work we develop an agent-based model where hysteresis in major macroeconomic variables (e.g. GDP, productivity, unemployment) emerges out of the decentralized interactions of heterogeneous firms and workers. Building upon the model in , we specify an endogenous process of accumulation of workers' skills and a state-dependent process of entry, studying their hysteretic impacts. Indeed, hysteresis is ubiquitous. However, this is not due to market imperfections, but rather to the very functioning of decentralised economies characterised by coordination externalities and dynamic increasing returns. So, contrary to the insider-outsider hypothesis (Blanchard and Summers, 1986), the model does not support the findings that rigid industrial relations may foster hysteretic behaviour in aggregate unemployment. On the contrary, in line with the recent discussion in Ball et al. (2014), this contribution provides evidence that during severe downturns, and thus declining aggregate demand, phenomena like lower investment and innovation rates, skills deterioration, and declining entry dynamics are better candidates to explain long-run unemployment spells and lower output growth. In that, more rigid labour markets dampen hysteretic dynamics by supporting aggregate demand, thus making the economy more resilient.

Agent-based model calibration using machine learning surrogates

“…Our machine-learning surrogate approach is different from kriging, which has been recently applied to ABMs dealing with industrial dynamics (Salle and Yildizoglu, 2014;Dosi et al, 2017c), financial networks (Bargigli et al, 2016) and macroeconomic issues (Dosi et al, 2016(Dosi et al, , 2017b. In particular, apart from the different statistical framework kriging relies on (it assumes a multivariate Gaussian process), the results it delivers once applied to ABMs may suffer from three relevant limitations.…”

Agent-Based Macroeconomics

“…In the following we will discuss mainly the model in Dosi et al (2010), which has been extended to introduce banks and macro-financial interactions (and to be used for fiscal, monetary and prudential policy exercises) in Dosi et al (2013), Dosi et al (2015), Dosi et al (2017a). The model has been used to analyze labor market issues and the effects of structural reforms in Napoletano et al (2012), Dosi et al (2017d), Dosi et al (2018), Dosi et al (2017b). For an application to the analysis of the effects of climate change, see Lamperti et al (2017).…”

“…Only the AGH model captures, in a rather sophisticated way, the market entry of firms and the associated decisions of potential entrants as well as financial transactions. A simple endogenous firm entry process, in which the (stochastic) number of entrants in a sector depends positively on the number of incumbents in the industry as well as on the sectoral ratio between firms' liquid assets and debt, has also been incorporated in a recent version of the KS model (see Dosi et al (2017b)). Although the possibility to consider spatial structures and (emerging) heterogeneities of distributions of agents characteristics across regions arguably is a merit of the agent-based modeling approach most of the models so far have not considered multi-regional settings.…”

“…In EUBI and EUGE the productivity of a worker is strongly influenced by her skills, which evolve endogenously over time. No such skill differentiation is present in the other (standard) models although a recent version of the KS model also exhibits heterogeneous and endogenously evolving skills of workers (Dosi et al (2017b)). Furthermore, dynamically adjusting reservation wages, which rely mainly on the worker's current (wage or unemployment) income, determine in several of the models, whether workers accept the jobs with the posted wages.…”

“…In a similar setting and following a similar logic Dosi et al (2018) show that the Fordist regime also induces lower unemployment and lower income inequality than alternative regimes under which firms have higher flexibility in dismissing workers. In Dosi et al (2017b) the Fordist and Competitive labor market regimes are compared with respect to the question how much hysteresis an economy exhibits under these regimes. The model of Dosi et al (2017d) is extended by incorporating endogenous skill dynamics of workers into the model and also introducing endogenous firm entry and the main focus of the analysis is on the question how strong and how long lasting the negative impact of a crisis on future growth is.…”