Recession Shapes of Regional Evolution: Factors of Hysteresis

Hie Joo Ahn and Yunjong Eo ()
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Hie Joo Ahn: https://www.federalreserve.gov/econres/hie-joo-ahn.htm

No 2025-062, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper empirically investigates sources of hysteresis, focusing on downward nominal wage rigidity and the gender gap in the labor market, using U.S. state-level payroll employment data. Employing a Bayesian Markov-switching model of business cycles, we identify U-shaped and L-shaped recessions, which correspond to quick recoveries and hysteresis, respectively. Both U-shaped and L-shaped recessions are driven by supply and demand shocks; however, U-shaped recessions are associated with recessionary shocks that raise labor productivity, whereas L-shaped recessions are also driven by shocks that reduce labor productivity. Following L-shaped recessions, recoveries in employment, output, and labor productivity are sluggish and accompanied by declining inflation. In contrast, U-shaped recoveries feature stronger rebounds without significant changes in inflation. Greater downward nominal wage rigidity and a larger gender employment gap both increase the likelihood of L-shaped recessions and hysteresis. Downward nominal wage rigidity enhances the effectiveness of both expansionary monetary and tax policies. While expansionary monetary policy becomes more effective with a larger gender gap, the effectiveness of tax cuts remains unaffected.

Keywords: Hysteresis; Regional business cycles; L-shaped recession; U-shaped recession; Wage rigidity; Gender employment gap; Monetary policy; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C22 C51 E32 E37 (search for similar items in EconPapers)
Pages: 50 p.
Date: 2025-08-13
New Economics Papers: this item is included in nep-cba and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-62

DOI: 10.17016/FEDS.2025.062

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