Working Paper

Recession Shapes of Regional Evolution: Factors of Hysteresis

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.

JEL Classification: C22; C51; E32; E37;

https://doi.org/10.17016/FEDS.2025.062

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-08-13

Number: 2025-062