Are Jobless Recoveries the New Norm?

Are Jobless Recoveries the New Norm?

Recent recessions have been followed by exceptionally slow recoveries in the labor market, and the current recession is shaping up to follow the same pattern. Read more (PDF)

  1. What is meant by a jobless recovery?
    • A jobless recovery is a recovery that is characterized by the unusually slow improvement of employment numbers. All it usually takes to declare the start of a recovery is for GDP growth to become positive, but in most recoveries, employment levels also return to their prerecession levels fairly quickly—within 21 months from the start of the recession (with the average recession lasting 10 months). In a jobless recovery, it takes much longer for employment levels to rise. For example, it took 31 months for employment to return to its prerecession level in the 1990-91 recession and 47 months in the 2001 recession.
  2. How have payroll employment levels dropped and the unemployment rate risen during the recent recession? How is this different from past recessions?
    • This past recession was the worst ever for both labor market measures in the United States. Payroll employment numbers dropped more during this past recession than in any previous U.S. recession, and the unemployment rate rose more than in any other U.S. recession.

      From the beginning of the recession in December 2007 to the end of February 2010, total nonfarm payroll employment declined about 8.4 million, or 6.1 percent. In the same period, the unemployment rate jumped from 5 percent to 10.1 percent (in October) before coming down to 9.7 percent today.

      Two things make the behavior of payroll employment and the unemployment rate in this past recession different from most other recessions. One is how far out of the typical range the numbers have gotten—the unemployment rate increase is much higher and the decline in payroll employment level is much lower than the average of all post-World War II recessions. The other thing that is different is that each measure is continuing to deteriorate for a much longer time than they do on average. In this respect, this past recession and the two that preceded it are similar. All of these recessions were long-unemployment-duration-driven episodes.
  3. What are the consequences of longer periods of unemployment? Do you think this has implications for government policy?
    • One consequence is that longer unemployment spells erode human capital. When workers are unemployed for longer periods, they can lose industry- and occupation-specific skills. As a result, their productivity will likely be lower when they find a job. Longer unemployment spells can also cause another kind of inefficiency in labor markets. Many workers might be tempted to take up the first job they find after a long spell of unemployment, no matter how good a match the job is for them, and they might be more likely to change employers when job prospects improve. Since recruiting for workers and looking for a job consume resources, this excessive labor market churning could be detrimental to overall productivity during the recovery. Lower productivity is bad because it will ultimately slow the rate of employment gains during the recovery and lower our standard of living.

      I think there are some important implications, but I don’t think we know nearly enough to suggest what government policy should be! The most important implication is that during unemployment spells, workers need to retain or build their skills, not let them waste away. It would be advantageous as well to think in terms of skills that will enhance their productivity. If they are in waning industries, maybe they need to consider new lines of work. It is not clear however, whether the government will be able to pick a better human capital investment decision for unemployed workers than the workers themselves.
  4. Why do employers lay off workers temporarily or cut their hours during recessions? What are the consequences of these practices when business picks up?
    • Some employers lay off their workers temporarily or reduce their hours at work because it saves the employer from having to spend money and time searching for good employees when economic conditions improve and the employer needs to hire more workers again.

      Both practices might be linked to a jobless recovery, though in different ways. First, if employers are making less use of temporary layoffs, it suggests a jobless recovery is likely. Workers who are laid off temporarily are likely to be rehired when business picks up, which will bring the unemployment rate down. Workers who are let go permanently are not as likely to be employed as quickly. If temporary layoffs don’t rise during a recession, it means fewer workers are expected to be rehired, so the unemployment rate might not fall as quickly during the recovery. During the last recession, temporary layoffs did not increase much; if anything, they declined a bit.

      On the other hand, the widespread use of reducing workers’ hours that we have observed lately also has implications for a jobless recovery. When economic activity starts to grow again, businesses will first likely increase hours of their employees before rehiring again. Since these workers are already counted in the employment statistics, this change will not result in a decline in the unemployment rate or a rise in employment level.