Flex Work Research Centre

Flexibility, sectoral hysteresis, and downturns

This paper sets up a two-sector growth model with sectoral hysteresis because of
intersectoral factor reallocation costs. The main results are: (i) The economy under study
exhibits nonergodic growth implying path-dependency (history matters) and permanent
consequences of temporary shocks. (ii) Flexible economies are more likely to take
advantage of technological improvements. The analysis points to a new mechanism in the
flexibility-growth nexus, which complements the findings of Bertola (1994). (iii) Periods
of negative growth can be explained as optimal responses of an economy to favorable
technology shocks. This result sheds light on the fact that economic development is
associated with recurring downturns.