Hysteresis and the Role of Downward Nominal Wage Rigidity: Evidence from U.S. States

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

No 2025-062r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper empirically investigates the sources of hysteresis, emphasizing the role of downward nominal wage rigidity using U.S. state-level payroll employment growth. U.S. states exhibit heterogeneous recoveries, with L-shaped and U-shaped recessions corresponding to persistent hysteresis and full recovery. L-shaped recessions are importantly driven by demand shocks and reinforced by downward nominal wage rigidity, which prolongs employment losses by raising real wages and deepening downturns. When wage rigidity is strong, expansionary policies are particularly effective in mitigating these effects through labor market adjustment. These mechanisms are validated in a New Keynesian model featuring both hysteresis and downward nominal wage rigidity.

Keywords: Hysteresis; Regional business cycles; L-shaped recession; U-shaped recession; Downward nominal wage rigidity; Monetary policy; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C22 C51 E32 E37 (search for similar items in EconPapers)
Pages: 58 p.
Date: 2025-08-13, Revised 2025-12-16
New Economics Papers: this item is included in nep-cba and nep-lab
Note: Revision
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-62

DOI: 10.17016/FEDS.2025.062r1

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