when the economy re enters an expansionary phase it is expected that businesses would start re hiring the unemployed and that the economy s unemployment rate would start declining towards its normal or natural unemployment rate until cyclical unemployment becomes zero this is the ideal scenario of course however hysteresis tells a different story 
hysteresis states that as unemployment increases more people adjust to a lower standard of living as they become accustomed to the lower standard of living people may not be as motivated to achieve the previously desired higher living standard also as more people become unemployed it becomes more socially acceptable to be or remain unemployed after the labor market returns to normal some unemployed people may be disinterested in returning to the workforce last and most significantly employers themselves have undergone significant pain during a downturn and will be more likely to demand more of remaining workers before taking on the larger costs of adding to their workforce output hysteresis can happen in the aftermath of economic downturns it s the decline in investment and productivity when businesses curtail their investment activities during recessions it often results in a reduction in the overall productivity of the economy the consequences of this diminished productivity can extend beyond the recessionary period in practical terms this implies that even when the economy begins to recover it may struggle to regain the growth trajectory it maintained prior to the downturn for instance companies may be hesitant on committing long term capital or being the first to introduce a new product to markets in the aftermath of economic downturns governments and central banks must not only focus on short term stimulus measures to address immediate economic challenges but also consider strategies to revive and sustain long term growth mitigating output hysteresis may involve targeted policies aimed at encouraging investment fostering innovation and enhancing productivity in order to counteract the lasting impacts of economic contractions following a financial downturn the initial response of banks is often to tighten credit as they deal with increased risks and uncertainties however what distinguishes credit market hysteresis is the prolonged nature of these tightened conditions even after the crisis has abated banks potentially hesitant by the experiences of the crisis may remain risk averse they may be cautious with their lending practices and perpetuating a persistent credit crunch even though that may not necessarily be required this sustained restriction in credit availability has far reaching implications for economic actors businesses find it challenging to secure the necessary financing for investments expansion and daily operations individuals face difficulties accessing credit for essential purposes like home purchases and education the consequences of credit market hysteresis extend beyond the immediate post crisis period acting as a drag on the overall economic recovery inflation hysteresis emerges when extended periods of either high or low inflation shape expectations for the future when inflation remains persistently low for example it can instill the belief that this trend will continue this can lead to expectations of ongoing low inflation and can make it hard for central banks striving to maintain price stability central banks may rely on the public s expectations of future inflation to guide their policy decisions in cases of inflation hysteresis where expectations become entrenched it becomes more challenging for central banks to implement effective monetary policies central banks may enact policies they think are best however the general public may latch onto inflation beliefs that perpetuate beyond what is actually happening hysteresis in unemployment can also be observed when businesses switch to automation during a market downturn workers without the skills required to operate this machinery or newly installed technology will find themselves unemployable when the economy starts recovering in addition to hiring only tech savvy workers these companies will ultimately hire fewer employees than before the recessionary phase in effect the loss of job skills will cause a movement of workers from the cyclical unemployment stage to the structural unemployment group a rise in structural unemployment will lead to a rise in the natural unemployment rate hysteresis can indicate a permanent change in the workforce from the loss of job skills making workers less employable even after a recession has ended example of hysteresisa tremendous example of hysteresis in the modern economy is the covid 19 pandemic on may 11 2023 the biden administration ended the public health emergency status of the crisis 2 however many of the economic responses taken during the pandemic are still being felt into 2024 the pandemic caused widespread job losses particularly in sectors like hospitality and travel that were hit hard by lockdowns the bureau of labor statistics projects the leisure and hospitality industry will employ just over 16 million individuals by the year 2031 this would eventually compare closely to the 16 6 million individuals employed in 2019 though the point is the lag in market response 3the pandemic has also led to inflationary pressures for example supply chain disruptions have increased the cost of goods and these cost increases have often been passed on to consumers in the form of higher prices note that despite easing rate hikes and monetary policy the average monthly inflation rate of 4 1 in 2023 was still the third highest average of the millennium behind only 2022 and 2021 respectively 4the last example related to the pandemic relates to consumer preference there were many barriers presented to in person shopping or consumption due to health restrictions as a result most americans turned to online shopping 5 with those barriers largely removed post pandemic there s a lot of evidence that shows post pandemic consumer behavior has changed this can loosely be defined as hysteresis as with the barriers removed and market conditions largely where they were pre pandemic consumers have not yet returned and may not return to what the trend was before 