The Labor Market & Economic Recovery

By Gnuschke, John E.; Wallace, Jeff et al. | Business Perspectives, Fall-Winter 2010 | Go to article overview

The Labor Market & Economic Recovery


Gnuschke, John E., Wallace, Jeff, Smith, Stephen, Business Perspectives


Introduction

On September 20, 2010, the National Bureau of Economic Research (NBER) announced that the longest recession since World War II actually ended in June 2009 ("Business Cycle Dating Committee, National Bureau of Economic Research"). Unfortunately, those who lost their jobs and could not find work could not relate to this "positive" news. Although much of the economy is showing signs of recovery, the labor market continues to struggle.

Recessions and the Labor Market

Traditionally, recessions have been defined by a period of gross domestic product (GDP) decline (or shrinkage) of at least six months (two quarters). More recently, the definition of a recession has been expanded. According to the National Bureau of Economic Research, "A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales" ("Business Cycle Dating Committee, National Bureau of Economic Research" Sept. 20, 2010). While this expanded definition includes fluctuations in employment, employment is only one of the many criteria considered, and GDP is still the primary driver.

To reconcile how the NBER can declare the latest recession to have ended but still have unemployment remaining so high, the NBER states, "A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak" (www.nber.org/cycles/recessions.html). In declaring that the end of the latest recession occurred back in June 2009, the NBER is only saying that the latest business cycle reached its bottom and economic activity is expanding from the trough (the bottom of the cycle). The NBER is not saying that the nation's economy has fully recovered. In fact, it will take many more months (maybe even years) before the labor market fully recovers. So, while the latest recession may be over, unemployment rates are remaining at or near 10.0 percent nationwide.

[GRAPHIC 1 OMITTED]

Employment is a lagging indicator. As shown in Chart 1, the relationship between GDP and employment is relatively dose, but employment reduction and growth lag behind GDP. This scenario is particularly clear in the latest recession, where real GDP began its rebound in the third quarter of 2009, yet employment continued falling through the first quarter of 2010.

By comparison, the 2000-2001 recession was mild compared to the 2007: Q4-2009: Q2 recession. After the end of that period, it took over four years before employment recovered to prior peaks. Both GDP and employment fell substantially farther in this recession, and it may take longer to fully recover. So, while the latest economic recession officially ended in June 2009 and the recession in the labor market lasted until February 2010, employment levels may not return to prior levels for years.

Cyclical Fluctuations and Structural Issues

Still, it must be understood that the labor market fluctuations during and following a recession are primarily cyclical. Cyclical refers to short-term or reversible issues that usually resolve themselves. When economic activity declines, businesses will slowly trim their labor force. When economic activity improves, businesses will slowly increase their labor force. This phase of a recession is seen as self-correcting. As Richard Eberling states, unemployment is a "necessary and healthy part of an economic recovery process that follows the bursting of the bubbles of an economic boom" ("Unemployment Trends and Economic Recovery" 2008).

Brad DeLong offers the following insights into the workings of this cycle:

a. businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even when there is temporarily nothing for them to do; b. businesses will cut back hours when unemployment rises, reducing output more than proportionately because total hours worked will fall by more than total bodies employed; c. …

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