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Jobless Recoveries: Causes and Consequences

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Abstract

June 2009 and overall economic activity has exhibited signs of recovery, labor market conditions remain disappointing. Payroll employment has been recovering slowly; the average duration of unemployment remains at a historical high; and the unemployment rate is projected to remain above 7.8 percent until 2013. 1 Economists are concerned that the U.S. economy is mired in another jobless recovery —when economic activity experiences growth but the unemployment rate remains high. To determine the severity of current joblessness, it is useful to compare the current state of the labor market with that during previous economic recoveries. The figure
unemployment
Jobless Recoveries:
Causes and Consequences
economic downturns experience a large,
negative and persistent eect to their lifetime
opportunities. Young workers who enter the
job market during a jobless recovery may
experience temporary unemployment and
are more likely to accept less-attractive and
lower-skill jobs due to limited opportunities.
On average, their initial wage is signicantly
lower than the initial wage of their counter-
parts who graduate when the job market is
strong. is disadvantage persists; even 15
years aer graduation, their wages and career
attainment remain lower than those of their
luckier counterparts.
e social consequences of a prolonged
jobless period may be as signicant as the
economic consequences. For example, the
majority of studies on unemployment and
crime suggest that a high unemployment rate
is positively linked to increases in property
crime.4 What is more, economists Naci
Mocan and Turan Bali found that the connec-
tion between joblessness and property crime
is asymmetric: An increase in the unemploy-
ment rate is accompanied by soaring property
crime, while a decline in the unemployment
rate is followed by only a gradual drop in
property crime. Serious property crimes may
further damage the economic development
and social welfare in urban areas, especially
in inner-city neighborhoods.
A recent study by economists Dhaval
Dave and Inas Rashad Kelly found that an
increase in the unemployment rate results
in negative changes in eating habits among
a studied group of people with a high risk of
unemployment. A 1 percent increase in the
unemployment rate is associated with a 2-4
percent reduction in the consumption of fruit
and vegetables. Such a reduction in healthy
food potentially aects workers’ health in the
long run. In low-income families, inadequate
nutrition could aect the physical and mental
development of children; the stress that aects
the jobless parents also aects their children.
e welfare of children in some communi-
ties could be further undermined because a
high unemployment rate may aect family
stability by reinforcing the retreat from
marriage.5 In less-auent communities,
economic status has been a requirement for
marriage. Less-educated people are even
less likely to have a job when the unemploy-
ment rate is high. Because of that, they nd
it harder to meet the material threshold for
marrying. Persistent joblessness may result
in a permanent cultural change in some com-
munities if marriage becomes a luxury good.
A Long Road Ahead
Federal Reserve Chairman Ben Bernanke
said last fall that job creation is probably
the most important problem facing the U.S.
economy.6 As of January 2011, the U.S.
economy needed roughly 6.8 million jobs to
return to a 5 percent natural unemployment
rate.7 is estimate is more complicated if
population growth, the discouraged worker
eect and the extension of unemployment
benets are taken into account.
Unemployed individuals who stop looking
for a job are called discouraged workers and
are not considered part of the labor force.
Discouraged workers may re-enter the labor
market when the economic activity bounces
back. A massive re-entry would temporarily
raise the number of unemployed workers so
that the unemployment rate could remain
unchanged or rise even as payroll employ-
ment increases.
An extension of unemployment insurance
would probably produce mixed eects on
the job market.8 Such an extension could
improve the eciency of matching workers
with appropriate jobs. On the other hand,
extended benets could discourage jobless
workers from accepting unattractive jobs,
thus keeping the unemployment rate rela-
tively high.
Taking these additional factors into
account, if the economy immediately gener-
ates 350,000 jobs a month—the pace of the late
1990s—four years would be needed to reach
an unemployment rate of 5 percent, whereas
at a rate of 210,000 jobs a month—the 2005
pace—11 years would be needed to achieve a
5 percent unemployment rate.9 Regardless, the
current recovery may be remembered as the
third consecutive, and likely the most severe,
jobless recovery. e social consequences may
be as painful as economic consequences. A
generation of childhoods, career paths, eating
habits and marriage culture may be perma-
nently altered.
Natalia Kolesnikova is an economist and
Yang Liu is a research associate at the Federal
Reserve Bank of St. Louis. See http://research.
stlouisfed.org/econ/kolesnikova/ for more on
Kolesnikova’s work.
Although the Great Recession ended in
June 2009 and overall economic activity
has exhibited signs of recovery, labor market
conditions remain disappointing. Payroll
employment has been recovering slowly; the
average duration of unemployment remains at
a historical high; and the unemployment rate
is projected to remain above 7.8 percent until
2013.1 Economists are concerned that the U.S.
economy is mired in another jobless recovery
—when economic activity experiences growth
but the unemployment rate remains high.
To determine the severity of current job-
lessness, it is useful to compare the current
state of the labor market with that during
previous economic recoveries. e gure
shows the U.S. unemployment rate during
the past four recoveries alongside the current
recovery. In the rst two cases, shortly aer
the 1973-75 and 1981-82 recessions ended,
the unemployment rate started to decline;
15 months aer the end of these two reces-
sions, the unemployment rate had dropped
to signicantly lower levels. ese were not
considered jobless recoveries. In contrast, in
the wake of the two recessions in the 1990s
and early 2000s, the unemployment rate con-
tinued to increase 15 months aer the end of
the recessions. ese were jobless recoveries.
Current developments in the labor market
are similar to the jobless recovery cases. Since
the Great Recession ended in June 2009, the
unemployment rate has remained high. It
topped 10 percent in late 2009, remained
above 9.4 percent in 2010 and was still at
8.9 percent in February 2011—much higher
than during any other recovery since the
1970s. Persistent and unusually high unem-
ployment suggests that this jobless recovery
might be more painful than the previous two.
–12 –9 –6 –3 0 3 6 9 12 15 18 21 24
11
10
9
8
7
6
5
4
3
1973-75
1990-91
PERCENT
MONTHS FROM RECESSION’S END
1981-82
2001 Current
Unemployment Rates after Recent Recessions
SOURCE: U.S . Bureau of Labor Sta tistics
Potential Causes of a Jobless Recovery
Many researchers have pointed to a labor
market mismatch as one of the reasons for
persistently high unemployment. Job growth
polarization, industrial reallocation and
organizational restructuring create a severe
mismatch between available workers and
appropriate job opportunities. Unemployed
workers are forced to look for jobs in dierent
occupations, industries and locations.
MIT Professor David Autor examined
U.S. employment opportunities over the
past three decades. He found that the U.S.
employment growth has polarized into
relatively high-skill, high-wage jobs and
low-skill, low-wage jobs while middle-skill
routine jobs have diminished. Some routine
jobs, such as administrative and operative
positions, have been replaced by computer
automation. Other routine jobs, such as
bill-processing and manufacturing positions,
have been moved overseas to take advantage
of lower wages. e Great Recession acceler-
ated this trend: Employment in middle-skill
and middle-wage occupations declined 7-17
percent during the recession.2
Job opportunities were also signicantly
reallocated between industries, suggests
a study by economists Erica Groshen and
Simon Potter. e 2007-09 nancial turmoil
and housing crisis had severe impacts on
industrial structure: During the recession,
employment in the construction industry
dropped 20 percent, and job opportunities
in the nancial industry declined 6 percent.
ese industries continued to shrink aer the
recovery began. By December 2010, payroll
employment dropped an additional 7 percent
in construction and 2 percent in the nancial
industry. Manufacturing and information
service industries were also badly aected.
Demand in these industries may never return
to prerecession levels; a portion of their job
losses are likely to be permanent.
Organizational restructuring, which leads
to an elimination of unneeded labor, espe-
cially by small rms, also creates structural
change in job opportunities. During the
Great Recession, small rms lost proportion-
ately more jobs than larger rms: e small
rms accounted for about 10 percent of total
net job loss despite their 5.3 percent employ-
ment share.3 Small rms also take longer
than large rms to rehire. Moreover, small
rms are more likely to close during eco-
nomic contraction; some of their job losses
might be considered permanent. Re-creating
these jobs takes more time than rehiring.
Consequences of a Jobless Recovery
Long periods of high unemployment are
without a doubt detrimental to unemployed
workers and to the health of the economy.
However, there are other, less-known
consequences.
Yale economist Lisa Khan found that col-
lege graduates entering the job market during
ENDNOT ES
1 e predicte d unemployment rate is f rom
the Sur vey of Professional Forecasters of the
Federal Reser ve Bank of Philadelphia.
2 e statistics are adapted f rom Autor.
3 Relevant d ata are from Busine ss Employment
Dyna mics of the Bureau of L abor Statistics.
4 A good summary can be found i n Garrett
and Ott.
5 See Edin and Kefa las for details.
6 See Di Leo.
7 e Congres sional Budget Oce estimates
that natural r ate of unemployment in t he
U.S. is 5 percent. It dene s the natural r ate of
unemployment as “the rate of unemployment
arisi ng from all sources except uctuations in
aggregate demand.” See Cong ressional Budget
Oce.
8 See El-G haza ly.
9 e calcu lation is performed based on t he
assumptions that populat ion grows at a
1 percent an nual rate and lab or force parti-
cipation rate returns to 66 percent (November
2007 level). More information is available
upon request.
REFERENCES
Autor, David. “e Polari zation of Job Opportu-
nities i n the U.S. Labor Ma rket.” e Hamilton
Project, A pril 2010.
Bureau of Labor Statistics Busines s Employment
Dyna mics. See ww w.bls.gov/bdm/
Congressional Budget Oce. e Budge t and
Economic Outlook : Fiscal Years 2008 to 2017,
Januar y 2007.
Dave, Dhava l M.; and Kelly, Inas R ashad. “How
Does the Busines s Cycle Aect Eating Habits?”
NBER Working Paper No. 16638, National
Bureau of Economic Research, December 2010.
Di Leo, Luc a. “Bernanke: Job Creation Is Top
Problem.” Real Time Economics, the Wall
Street Journal. Nov. 30, 2010.
Edin, Kathr yn; and Kefal as, Maria. “Promises
I Can Keep: Why Poor Women Put Mot her-
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of Cali fornia Press. 2005.
El-Gha zaly, Hoda. “e In s and Outs of Unem-
ployment In surance.” Federa l Reserve Ban k
of St. Louis’ Liber8 Economic Information
Newsletter, Novem ber 2010.
Federal Reser ve Bank of Philadelphia. Survey of
Professional Forecasters, First Quarter 2011.
See ww w.philadelphiafed.org/research-and-
data/rea l-time-center/survey-of-profes sional-
forecaster s/2011/s ur vq111.cfm
Garrett, oma s A.; and Ott, Lesli S. “City Busi-
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July 2009.
Groshen, Er ica L.; and Potter, Simon. “Has
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Recover y?” Federal Reserve Bank of New
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No. 8, pp. 1-7.
Kahn, Lisa B. “ e Long-Term Labor Ma rket
Consequences of Graduating from Col lege
in a Bad Economy.” e Labour Economics,
April 2010, Vol. 17, No. 2, pp. 303-16.
Mocan, H . Naci; and Bali, Tura n G. “Asymmet-
ric Crime Cycles.” Review of Economics and
Statistics, November 2010, Vol. 92, No. 4,
pp. 8 99-911.
By Natalia Kolesnikova and Yang Liu
© ANDY SACK S/GETT Y IMAGES
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The Polarization of Job Opportunities in the U.S. Labor Market
  • David Autor
Autor, David. " The Polarization of Job Opportunities in the U.S. Labor Market. " The Hamilton Project, April 2010.
Has Structural Change Contributed to a Jobless Recovery Federal Reserve Bank of New York Current Issues
  • Erica L Groshen
  • Simon Potter
Groshen, Erica L.; and Potter, Simon. " Has Structural Change Contributed to a Jobless Recovery? " Federal Reserve Bank of New York Current Issues, August 2003. Vol. 9, No. 8, pp. 1-7.
The Ins and Outs of Unemployment Insurance Federal Reserve Bank of St. Louis' Liber8 Economic Information Newsletter
  • Hoda El-Ghazaly
El-Ghazaly, Hoda. " The Ins and Outs of Unemployment Insurance. " Federal Reserve Bank of St. Louis' Liber8 Economic Information Newsletter, November 2010.