Recession & work ethics

Do recessions have longlasting adverse effects upon output? One common answer is that they do, to the extent that young people who are out of work lose experience and training and so are less productive even many years later. However, in a recent paper Dennis Snower and Wolfgang Lechthaler point to another mechanism through which such hysteresis can occur. Quite simply, unemployment causes otherwise diligent workers to lose their work ethic:

The deterioration of employment prospects during a deep, prolonged recession might induce some elite workers to lose their pro-work ethic. Since identities are sticky, they might keep their new identity even when the recession is long past. In this way, temporary shocks can have permanent effects and thus our model can explain the hysteresis in unemployment observed in many European countries.

This is consistent with evidence that deep recessions do indeed have long adverse effects upon output, and - of course - it strengthens still further the argument for policies aimed at ensuring near-full employment.

However, it bears upon another issue, one which often divides left and right - namely, the extent to which individuals' attitudes (such as work ethic and locus of control) are a cause of economic outcomes or a result of them. In other words, are the sort of people who appear on the Jeremy Kyle show the cause of mass unemployment or the effect?

Snower and Lechthaler's paper suggests the answer is at least partly "effect." In this sense, we can read it alongside Malmendier and Nagel's famous study (pdf) of the longlasting effects on risk appetite of recessions, and the evidence that people who are primed to conform (pdf) to adverse stereotypes really do live down to them.All provide corroboration of Marx's famous claim:

The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.

Comments

[Anonymous]

A very excellent post! My mate Karl sums it all up in the last paragraph.

[Paul McCormack]

My personal treatment at the hands of employers in the last few years has shredded any sense of loyalty to any future employer. The treatment of workers has, frankly, been disgraceful, even though corporate profits have remained high. Employers seem to have used this period as an excuse to forget about their obligations, whilst the highest earners have continued to do well.

[Ralph Musgrave]

The bulk of studies seem to confirm the hysteresis effect, but there’s actually one study that disputes the effect:

http://www.econ.cam.ac.uk/cjeconf/delegates/webster.pdf

Also I’d question Snower and Lechthaler’s claim that “prolonged recession might induce some elite workers to lose their pro-work ethic.” Employers tend to hoard their “elite” workers in a recession, while sacking the less productive.

[Szczepan Stachura]

Why it always have to be workers? I feel like discussing Ricardo’s „worker plus shovel” model. In recession firms have no incentive to invest in new productive capacity, as current one is not used. Potential output drops.
As they don’t trade that much they loose contacts and market knowledge. Potential output drops.
As they have acces to cheap and willing labor, and don’t have to try hard to meet demand, they don’t improve organization and technology. Productivity may go up, as laborers try harder, and weaker of them are fired (as Ralph Musgrave said above)– but long run productivity is stagnating.
Did I say before, that potential output drops?

[reason]

"Employers tend to hoard their “elite” workers in a recession, while sacking the less productive."

Why do you think that? Do you have any evidence for it?