The idea of hysteresis is used extensively in the area of labor economics, specifically with reference to the unemployment rate. According to theories based on hysteresis, severe economic downturns (recession) and/or persistent stagnation (slow demand growth, usually after a recession) cause unemployed individuals to lose their job skills (commonly developed on the job) or to find that their skills have become obsolete, or become demotivated, disillusioned or depressed or lose job-seeking skills. In addition, employers may use time spent in unemployment as a screening tool, i.e., to weed out less desired employees in hiring decisions. Then, in times of an economic upturn, recovery, or "boom", the affected workers will not share in the prosperity, remaining unemployed for long periods (e.g., over 52 weeks). This makes unemployment "structural", i.e., extremely difficult to reduce simply by increasing the aggregate demand for products and labor without causing increased inflation.  That is, it is possible that a ratchet effect in unemployment rates exists, so a short-term rise in unemployment rates tends to persist. For example, traditional anti-inflationary policy (the use of recession to fight inflation) leads to a permanently higher "natural" rate of unemployment (more scientifically known as the NAIRU). This occurs first because inflationary expectations are "sticky" downward due to wage and price rigidities (and so adapt slowly over time rather than being approximately correct as in theories of rational expectations) and second because labor markets do not clear instantly in response to unemployment.
The existence of hysteresis has been put forward as a possible explanation for the persistently high unemployment of many economies in the 1990s. Hysteresis has been invoked by Olivier Blanchard among others to explain the differences in long run unemployment rates between Europe and the United States. Labor market reform (usually meaning institutional change promoting more flexible wages, firing, and hiring) or strong demand-side economic growth may not therefore reduce this pool of long-term unemployed. Thus, specific targeted training programs are presented as a possible policy solution. However, the hysteresis hypothesis suggests such training programs are aided by persistently high demand for products (perhaps with incomes policies to avoid increased inflation), which reduces the transition costs out of unemployment and into paid employment easier.