Persistence (macroeconomics)

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Persistence ( persistentia [lat.] = Persistence, perseverance, obstinacy, obstinacy) describes in macroeconomics the persistence of macroeconomic variables at a level once reached.

Persistence is used in two subject areas of economics . The inflation rate and unemployment are referred to as persistent variables, against the background that the original equilibrium could not be restored in both subject complexes as a result of strong economic changes ( shocks ).

Persistence of inflation

A central building block for macroeconomic theory and economic policy is the Phillips curve and the relationship between inflation and unemployment described with it. In most national economies, such as Germany, an anti-proportional relationship between inflation and unemployment could be seen in the 1960s. When the unemployment rate was low, the rate of inflation was high; when the unemployment rate was high, the inflation rate was relatively low. After 1970, however, this negative relationship between the inflation rate and the unemployment rate largely collapsed.

There were two main reasons for this development in Germany:

  • the German economy was affected by two sharp increases in the price of oil , and the state further fueled inflation through its demand policy
  • a changed expectation of the wage setters due to the inflation development during the 1960s

The development of inflation rates in most economies was not a persistent phenomenon until the 1960s. One year the inflation rate was positive, the next year it was negative. In the course of the 1960s, the inflation rate assumed positive values ​​and became more and more persistent. A high inflation rate was followed by a positive inflation rate in the following year. As a result of the persistence of inflation, wage setters, employees and companies changed their expectations. If inflation is expected to rise across the economy, price and wage negotiations will be higher, which will also change the structure of the relationship between unemployment and inflation. A new connection emerged: the relationship between the unemployment rate and the change in inflation (modified Phillips curve, Phillips curve expanded to include expectations).

The relationship between unemployment and inflation has likely changed with the level and persistence of inflation.

Persistence of unemployment

A new macroeconomic approach is exploring the explanation of persistent unemployment in Europe and identifying mechanisms that may be responsible for making unemployment very difficult to return to initial levels once it has risen due to supply shocks .

Explanation of terms and example

The following example should clarify this fact:

Fig. 1: Development of unemployment 1974–1985 using the example of Europe vs. United States

Figure 1 shows how unemployment behaves in Europe and the United States as a result of the two oil price shocks in the mid and late 1970s. The rise in unemployment was accompanied by an increase in the inflation rate, which was probably caused by the supply shocks. In the case of the American example, the rise in the price of oil led to an increase in unemployment. After oil prices stabilized, this effect disappeared. Unemployment fell to the starting level. In the case of the European example, unemployment rose faster than in the US due to the oil price shocks. Even after oil prices returned to baseline, there was no trend for unemployment to fall as well. This general phenomenon whereby an increase in unemployment raises equilibrium unemployment and this effect persists after the original cause of the increase in unemployment disappears is known as persistence.

Figure 2 shows the data from the Netherlands to illustrate the European example.

Fig. 2: Example of the Netherlands - development of the unemployment rate vs. Development of the oil price

If the Dutch unemployment rate is compared with the real oil price of the previous year, parallel developments can be found in the years 1973 to 1986. The oil price shocks raised unemployment to a higher level in two stages. When oil prices fell, the correspondence between the two curves collapsed. Despite falling oil prices, there has been significant persistence in the unemployment rate. Even after the triggering moment had disappeared, unemployment remained largely at the level it had reached when it took effect.

Persistence slows the dynamism of the economy. Even after the cause of the increase disappears, the economy does not return to its original equilibrium. The extreme form of persistence is known as hysteresis . Hysteresis occurs when temporal shocks and economic fluctuations permanently influence the macroeconomic equilibrium. Hysteresis is very rare in reality, the weaker form in the form of persistence seems to be the rule here.

Causes of persistence

Different, mutually reinforcing developments can be cited as causes of persistence:

Devaluation of human capital

The increasing depreciation of human capital as a result of prolonged unemployment can be seen as a determining factor for persistence . The accumulation of job-specific skills, abilities and knowledge is learned in practice. Unemployment causes these qualifications to decline after a certain time due to technical progress and the dynamic economy. When the economy recovers after a recession , it can happen that companies no longer find the same work-specific and general knowledge, as the unemployed are decoupled from the “learning by doing” process. As a result, short-term unemployed people are preferred for recruitment. The long-term unemployed have poorer market entry opportunities, as a result of which discouraged unemployed people give up looking for a job or are directly rejected by companies as being less suitable and a floor of unemployment develops.

Insider-outsider models

Another cause of the persistence of unemployment is provided by “insider-outsider” models. These models establish a monopoly position for insiders (employees) in wage negotiations, since the labor force becomes unaffected in terms of collective bargaining policy by entering unemployment and companies are prevented from exchanging "insiders" for "outsiders" (unemployed) because of the costs ("turnover costs"). ) refrain. Insiders make sure to keep their jobs on the same or better conditions and to secure their own employment, outsiders (unemployed) might be interested in working for a lower wage. In wage negotiations, only the interests of the insiders are ostensibly pursued. If unemployment occurs as a result of exogenous shocks, this can be seen as an indication of persistence due to the market power of the insiders.

Lack of capital due to supply shocks

A lack of capital can create persistence due to supply shocks and the associated low investment activity, since employment changes are not “free”. Due to supply shocks, the aggregate supply curve shifts to the left, the demand for labor falls , and the capital stock falls. In the economic upswing , however, there is no possibility of re-employment of previously laid-off workers. The result is prolonged unemployment. For this reason, it is better to adjust the employment level in small steps than in one big leap.

Rigidities

Rigidities impose a large number of restrictions on companies, which lead to considerable costs and thus to unemployment ( Eurosclerosis ). Institutional arrangements can therefore have an impact on unemployment.

This should be shown by comparing the United States with Europe:
Flexible real wages, low market exit costs for employees, relatively short social security in the event of unemployment increase the pressure in the United States to take up new jobs, increase the search intensity and mobility of job seekers and increase willingness " to accept low-quality jobs. In contrast, Europe is characterized by a low adaptive capacity resulting from a well-developed system of social security, inflexible prices, high legal and monetary market exit barriers and a low willingness to move. Also are income tax and non-wage labor costs are significantly higher than in the US. The minimum wages in Europe are relatively high, which in connection with the high non-wage labor costs makes it disadvantageous to employ unskilled workers, which makes persistence inevitable.

Factors that increase persistence

Growing technical progress, rapid structural change and higher qualification requirements contrast with a declining employment share for people without completed vocational training and people with outdated qualifications. The job risk of less competitive workers increases and their chances to enter the market deteriorate.

As a result of mass production in the 1960s, there were price reductions and thus a strong increase in demand. This in turn led to an expansion of production, which resulted in further price cuts. The high price elasticity of demand enabled a large number of new hires. Since the 1980s there has been a decline in the price elasticity of demand, which has led to stagnation in employment.

Summary

Unemployment and inflation are among the central problems of an economy. Since the persistence mechanisms of unemployment work together and the contribution of each individual explanatory approach cannot be clearly identified, unemployment must be combated with a multitude of measures. The explanatory approaches are also partly controversial, since economics is a living discipline that is able to keep pace with changes in the environment, to find theoretical explanations and to formulate instructions for action.

Individual evidence

  1. ^ Langenscheidt foreign dictionary. (from April 2, 2008)
  2. ^ Paul Wachtel: Macroeconomics. Munich / Vienna 1994, p. 193.
  3. ↑ L. Funk, E. Knappe: New ways out of unemployment. ( Memento of the original from January 4, 2005 in the Internet Archive ) Info: The @1@ 2Template: Webachiv / IABot / www.adecco-stiftung.de archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (from April 1, 2008)
  4. ^ Wolfgang Franz: Labor Economics. 6th edition. Berlin / Heidelberg / New York 2005, p. 384.
  5. ↑ L. Funk, E. Knappe: New ways out of unemployment. ( Memento of the original from January 4, 2005 in the Internet Archive ) Info: The @1@ 2Template: Webachiv / IABot / www.adecco-stiftung.de archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (from April 1, 2008)
  • Oliver Blanchard, Gerhard Illing: Macroeconomics. 3. Edition. Pearson Education, Munich 2003. ISBN 3-8273-7051-5
  1. ↑ p. 245
  2. ↑ p. 239 ff.
  3. ↑ p. 245
  4. ↑ p. 247
  5. ↑ p. 257
  6. ↑ p. 665
  7. ↑ p. 668 f.
  • Manfred Gärtner: Macroeconomics. Pearson Education, Harlow England 2003. ISBN 0-273-65163-3
  1. ↑ p. 419
  2. ↑ p. 418
  3. ↑ p. 419
  4. ↑ p. 420
  5. ↑ p. 420
  1. ↑ p. 401
  2. ↑ p. 403
  3. ↑ p. 402
  4. ↑ p. 404
  • Bernhard Külp: Labor market and unemployment. Rudolf Haufe, Freiburg i. Br. 1996. ISBN 3-448-03454-1
  1. ↑ p. 70
  2. ↑ p. 70 f.
  3. ↑ p. 71 f.
  4. ↑ p. 74
  5. ↑ p. 76
  6. ↑ p. 78 f.

literature

  • Oliver Blanchard, Gerhard Illing: Macroeconomics. 3. Edition. Pearson Education, Munich 2003. ISBN 3-8273-7051-5
  • Wolfgang Franz: Labor Economics. 6th edition. Springer, Berlin / Heidelberg / New York 2005. ISBN 3-540-32337-6
  • Manfred Gärtner: Macroeconomics. Pearson Education, Harlow England 2003. ISBN 0-273-65163-3
  • Horst Hanusch, Thomas Kuhn, Uwe Cantner: Economics. Volume 1. 6th edition. Springer, Berlin / Heidelberg / New York 2002. ISBN 3-540-43288-4
  • Bernhard Külp: Labor market and unemployment. Rudolf Haufe, Freiburg i. Br. 1996. ISBN 3-448-03454-1
  • Michael Olsson, Dirk Piekenbrock: Gabler Lexicon environmental and economic policy. 2nd Edition. Gabler, Wiesbaden 1996. ISBN 3-409-29981-5
  • Paul Wachtel: Macroeconomics - From Theory to Practice. R. Oldenbourg, Munich / Vienna 1994. ISBN 3-486-22540-5
This version was added to the list of articles worth reading on May 20, 2008 .