When cyclical unemployment is allowed to fester long enough, the economy’s potential level of “full employment” declines. This is called “hysteresis” but I don’t think people understand it very well. This Bloomberg piece strikes me as typical of a lot of recent press treatment:
After looking for work since May 2009, Raquel Barron, 40, hears the same thing when she interviews: We don’t want to hire someone who’s been jobless for so long. “They still put me at the bottom of the list when I tell them I’ve been unemployed for three years,” said Barron, who moved into her parents’ home in El Sobrante, California, after losing her administrative job at a construction company. “Every single day, I go on Craigslist to look at their listings. But I feel like my chances are only getting worse.”
Discrimination and quasi-discrimination against the long-term unemployed is a real thing. But I think the real bite of hysteresis is in some ways more banal. Imagine a guy with a small business that involves a few people driving stuff around in trucks. When the downturn first strikes, he cuts his workers hours. When it lingers on, he lays some workers off. If the economy bounced back at this point, all he needs to do is rehire a worker. But if the downturn lingers long enough one of the trucks will break. If the truck doesn’t get repaired (and why should it be) then the economy’s ability to re-employ a new truck driver is impaired. If the downturn has gone on so longer that the guy who knows how to fix trucks has left town for North Dakota, then we’re even more impaired.
Or this could work on other kinds of factors of production. Many people can’t work more hours unless they can make day care arrangements for their kids. But if a regional economy’s been operating at a depressed level for a long time, some of the day care centers are going to close which becomes a new hurdle to re-employment for the day care center’s previous clients.