Unit Root in the Wage‐Price Spiral Is Not Hysteresis in Unemployment

Abstract

Hysteresis is one of the main concepts used in Layard, Nickell and Jackman′s book, Unemployment: Macroeconomic Performance and the Labour Market. Attempts to clarify the concept of hysteresis, from its formal representation to its empirical applications. Emphasizes the idea that hysteresis refers back to a given set of formal properties, independently of the phenomenologies within which it is liable to be encountered. In economics, the fields concerned may indeed vary a lot (labour market, foreign trade, etc.). By highlighting all the formal properties of hysteresis, shows how the assimilation of phenomena characterized by a zero eigenvalue for linear systems (or unit‐root systems for discrete‐time processes) is wrong and, moreover, how the imprecise use of the concepts can lead to the particular constraints affecting unit‐root econometrics being overlooked.

A strong hysteretic model of Okun’s Law: theory and a preliminary investigation

“…It has been applied mainly, but not only, to the study of exchange rates dynamics (Amable et al 1991;Göcke 2003), and to unemployment . As argued by Amable et al (1993Amable et al ( , 1994 and Cross (1993Cross ( , 1995, the multiple other uses of the term 'hysteresis' are inappropriate, and these inappropriate uses can be found in economics only. 4 The definition of hysteresis used in this paper is the only one that is used in physics (from where the term originates) and biology, and which respects the mathematical properties of the concept.…”

Are the traditional trade-exchange rate theorems relevant for developing countries facing entry costs in international markets?

“…and P = EP (4) where is the real product exchange rate, normally assumed constant over time. In addition to the assumptions highlighted above, an additional argument in favor of the relative versions is related to assumptions regarding identical goods.…”

“…Dornbusch analyzed short run exchange rate pass-through within a number of conventional industrial organization models, showing how exchange rate pass-through depends on industry characteristics, such as the degree of market concentration, the degree of product homogeneity and substitutability, in addition to domestic and foreign …rms market shares. 4 Consider for instance the situation of Dornbusch (1987), where Cournot competition, linear demand and domestic and foreign …rms producing a homogeneous good, the industry price P equals…”

“…Here, n is the number of foreign …rms, and n the number of domestic …rms in 4 Dornbusch emphasises the short run nature of the model, by focusing on the fact that wages are …xed, and that no industry relocation occurs (Dornbusch;1987, p.104). the industry, e the exchange rate, while w and w are unit costs in foreign and domestic currency respectively.…”

“…This approach was developed by Amable et al (1991Amable et al ( , 1993, and Cross (1994). These papers combine a multitude of discontinuous microeconomic hysteresis loops of heterogenous …rms into a macroeconomic hysteresis loop, where hysteresis e¤ects occurs continuously with every change in the direction of the input path, as long as local extreme values are passed.…”