Hysteresis and the Labour Market

Hysteresis in unemployment: This is achieved through two approaches. First we used the Preisach model - a mathematical framework for hysteresis in physics and electromagnetism - to derive an index of hysteresis in the unemployment data where only long lasting shocks remain in the memory bank of the series (see Piscitelli, Cross, Grinfeld, and Lamba (2000)). Second, we use a DSGE model a la Blanchard and Gali (2010) which we extend on two fronts: (i) we account for the external sector following Gali and Monacelli (2005); (ii) we use the framework of Gali (2015) that introduces hysteresis in the labour market in a DSGE setting. This allows us to derive a marginal cost of firms that depends directly on labour market variables (unemployment in particular), on the hysteresis parameter and on terms of trade shocks.