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A-Level Economics · AD shift left (recession) diagram question

EVALUATION: why is this negative output gap especially damaging if it PERSISTS?

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The answer

Hysteresis — the long-term unemployed lose skills, so labour supply is permanently lower and future growth is damaged. People lose their job and then lose their skills. Human capital detaches from the market, labour supply falls permanently, and LRAS falls with it. Hysteresis is not 'people stuck in one job' — it is that people lose their job and then lose their SKILLS. The longer someone is out of work the more their human capital goes out of date, the harder a new job is to get, and the stigma grows. Labour supply is permanently lower, so LRAS falls as well as actual output. That is exactly why Keynesians want the recession fixed fast.

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