Macro Foundations · advanced
What moves on the Phillips Curve diagram
Hysteresis converts cyclical unemployment into structural unemployment as skills and attachment decay, shifting the long-run Phillips curve right. In the short run the economy moves along the unchanged SRPC to higher unemployment and lower inflationinflationA sustained rise in the overall price level, eroding money's purchasing power.; once expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. adjust, inflation returns to target and only the higher natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle. remains.
A deep recession has left many workers unemployed for more than a year.
Skills decay, professional networks fade, and employers treat long gaps as a warning sign.
Those workers become effectively unemployable at current wages, so the natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle. itself rises and the LRPC shifts right.
Watch the crossing point move up the short-run curve: with the SRPC unchanged, higher unemployment comes with lower inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. for now.
That disinflation does not last. As expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. adjust upward to the economy's worse supply side, the SRPC lifts and inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. returns to target, leaving only the permanently higher unemployment. This is hysteresis: a temporary demand shock scars the supply side.
Examiners ask this as: hysteresis, scarring, long term unemployed, skills decay, natural rate rises.
Other scenarios on Phillips Curve