A Pure Insider Theory of Hysteresis in Employment and Unemployment

A hysteresis equation is proposed in which changes in inflation depend on the rate of change of employment. To justify this equation it is assumed that wage claims are fixed by insiders, that the workers' bargaining strength is inversely related to the fear of losing their Jobs, and that the latter increases when employment decreases. Then it is argued that the NAIRU need be neither unique nor stable. It is also shown that if trade unions exist which strive to stabilize the rate of unemployment, the workers' militancy can be influenced in such a way that a stable inflation is compatible with a constant and path-dependent rate of unemployment. Lastly the Keynesian implications of the analysis, both theoretical and political, are highlighted.