By Jon Hilsenrath
Feb. 25, 2021 3:56 pm ET
Imagine for a moment two objects in your hands. One is a piece of paper and the other a rubber band. If you squeeze your hands together hard and let go, the paper will remain crumpled, but the rubber band will return to its original shape.
Economists tend to think of the economy as the rubber band. After a shock, they expect it to go back to normal. When it doesn’t, like the crumpled paper, they call the effect “hysteresis”—lasting changes caused by some large perturbation. The Covid-19 pandemic is a classic example. What permanent damage to the economy will it leave behind?
The first place to look is in classrooms, say Eric Hanushek and Margaret Raymond, economists and education researchers at Stanford University. Lost study time for children during the pandemic has the potential to do lasting harm not just to their own long-term prospects but to American prosperity in general, say the married couple.
Ms. Raymond studied 18 states and Washington, D.C. and concluded that, on average, children lost 116 days of reading time during the early stages of the pandemic last year and 215 days of math work—instruction that will be hard to regain and could leave a whole generation of children struggling to keep up in their studies and testing. If your child misses out on learning fractions now, how will she perform in algebra later?
And the shock has been distributed unevenly. Children in rural areas and areas with large Black and Hispanic populations were hit the hardest. Among the states suffering the most are South Carolina and Illinois, according to Ms. Raymond’s study.
Economic output is a function of innovation, the skills that workers bring to their jobs and the machines that they use to create goods and services. Innovation and skills are shaped by education. Over the next century, the skill shock of 2020 will produce $25 trillion to $30 trillion of lost economic output in today’s dollars, Mr. Hanushek estimates, and the lifetime household incomes of the affected students will be 6% to 9% lower.
He came to this conclusion in part by examining the experience of German students. In 1966 and 1967, the German government temporarily shortened the school year in a rejiggering of the school calendar. Longitudinal studies, he says, show that this lost class time reduced the incomes of that cohort of students by 5% over their lifetimes. Today’s students “are going to feel the long-term effects of Covid even when they are back in school,” Mr. Hanushek says.
Economists borrowed the term hysteresis from the physics of magnetism. If you apply a large enough magnetic force to a metal object, the polarity of the object can be permanently transformed. It’s the mechanism used, for instance, to create memory in a hard drive. In economics, hysteresis is typically associated with damage after shocks, though there can be positive transformations too, such as the development of vaccine technologies and work-from-home options.
For many years, economists have looked for evidence of hysteresis in labor markets. In Europe in the 1970s and 1980s, economists Olivier Blanchard and Lawrence Summers noticed that unemployment tended to increase during economic downturns, as expected, but didn’t fully return to previous levels when the economy revived. The rubber band, in other words, didn’t regain its shape.
In a 1986 paper, “Hysteresis in Unemployment,” the professors surmised that this was because of structural problems in these markets. Unions tended to fight hard to keep their workers from losing jobs but did little to help them after they were released, making it hard for them to be re-employed. Labor protections encoded in the law had the same effect: Firms were reluctant to rehire after downturns because it was so hard to let go of people in a recession. “Shocks that we thought should be temporary had long-lasting effects,” Mr. Blanchard said in a recent interview.
Three decades later, Mr. Blanchard went back and looked at the problem of hysteresis in labor markets after the 2007-09 financial crisis. Millions of Americans were experiencing long spells of unemployment. In 2010, nearly half of unemployed workers were without a job for at least six months, an astonishingly high number. In the half-century before the crisis, just one of every eight unemployed workers, on average, went without work for that long.
Mr. Blanchard and other economists worried about the lasting damage to people who sat on the sidelines of the job market and saw their skills deteriorate. Some stopped looking for work; others found income on federal disability rolls. As the expansion marched on, however, some were drawn back into the labor market. Mr. Blanchard, to his surprise, found evidence of hysteresis less compelling than he had expected.
In the current economic crisis, policy makers in Washington are eager to drive the jobless rate down as fast as possible to reverse a new upsurge in long-term unemployment. It’s one reason why Treasury Secretary Janet Yellen—a labor economist—has called for Congress to “go big” on a relief package.
Hysteresis may be acting on whole industries this time, Mr. Blanchard said. Air travel, commercial real estate and bricks-and-mortar retailing, for example, might never be the same.
Like Mr. Hanushek and Ms. Raymond, Mr. Blanchard is most worried about the long-run effects of the Covid crisis on children and their future as workers. “I would do everything I can to allow children to go safely back to school in person,” he said. Ms. Raymond said that it might be time to start thinking about sending children to summer school to make up for lost time. At the very least, she said, it is time for educators to start thinking about how to fix schooling once the pandemic ends.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com