Academic journal article Brookings Papers on Economic Activity

The Labor Market in the Great Recession-An Update to September 2011

Academic journal article Brookings Papers on Economic Activity

The Labor Market in the Great Recession-An Update to September 2011

Article excerpt

ABSTRACT Since the end of the Great Recession in mid-2009, the unemployment rate has recovered slowly, falling by only 1 percentage point from its peak by September 2011. We find that the lackluster labor market recovery can be traced in large part to weakness in aggregate demand; only a small part seems attributable to increases in labor market frictions. This continued labor market weakness has led to the highest level of long-term unemployment in the postwar period and a blurring of the distinction between unemployment and nonparticipation in the labor force. We show that flows from nonparticipation to unemployment are important for understanding recent changes in the duration distribution of unemployment. Simulations that account for these flows suggest that the labor market is unlikely to be subject to high levels of structural long-term unemployment after aggregate demand recovers.

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In the Spring 2010 volume of the Brookings Papers, we provided an analysis of U.S. labor market developments in the most recent recession (Elsby, Hobijn, and Sahin 2010). We documented that, from the perspective of a wide range of labor market outcomes, the 2007-09 recession caused the deepest labor market downturn in the postwar era. Here we update that earlier work and provide new analyses and results regarding the extent and persistence of long-term unemployment in the aftermath of the recession.

Section I provides a summary update of our original work, focusing on indicators of labor market adjustment such as the Okun's Law relationship and the Beveridge curve. We also discuss recent research regarding the implications of these indicators for the extent of structural unemployment and conclude that it appears to be limited. Section II extends our earlier analyses by describing a set of new facts about unemployment inflows and outflows, which determine the path of the unemployment rate and its duration distribution. We document a sharp increase since the beginning of the recession in the incidence of measured monthly inflows to unemployment at reported durations that substantially exceed 1 month. These inflows appear to reflect a rising tendency for respondents to report the elapsed time since they first started searching rather than continuous periods spent in active search. On the basis of this more complete characterization of net flows, in section III we update the simulation of unemployment dynamics presented in Elsby and others (2010). The results indicate that long-term unemployment will largely dissipate if exit rates for the short-term unemployed recover, reinforcing our conclusion that the current extent of structural unemployment is quite limited.

I. Update on Labor Market Adjustment

As we documented in Elsby and others (2010), the labor market downturn that accompanied the 2007-09 recession was the most severe of the postwar era, and the subsequent recovery has been tentative and uneven. The most adversely affected groups include men in general as well as younger workers, less educated workers, and workers belonging to ethnic minorities. Starting in early 2010, labor market conditions have begun to recover slowly. The unemployment rate, which peaked at 10.1 percent, fell to 9.0 percent as of September 2011, still 4.6 percentage points above its prerecession low. Of the groups that experienced larger increases in their unemployment rates during the recession, most--including men, younger workers, and Hispanics--have since seen relatively larger declines in their unemployment rates (table 1). (1)

Elsby and others (2010) showed that the nature of labor market adjustment until mid-2009 displayed a notable resemblance to that observed in past severe downturns. Starting in 2009, however, indicators of real activity and the labor market began to diverge from past patterns. We summarized this divergence in the context of Okun's Law and the Beveridge curve and concluded that labor market conditions were weaker than implied by historical relationships between real activity and the labor market. …

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