Academic journal article Contemporary Economic Policy

Productive Recessions and Jobless Recoveries

Academic journal article Contemporary Economic Policy

Productive Recessions and Jobless Recoveries

Article excerpt

I. INTRODUCTION

Recent US business cycles have exhibited important changes in labor force dynamics, which we depict in Figure 1. The figure plots year over year growth in productivity (dashed) and employment (solid) since 1960. While recessions are traditionally associated with declining labor productivity, defined as output per hour, during the last three recessions the growth rate in labor productivity remained robust (indicated by dark grey shaded recession bars). In addition, each of the last three recessions has been followed by negative employment growth during the early stages of recovery (delineated by dashed vertical lines). We refer to these phenomena as productive recessions and jobless recoveries. Although the existing literature has focused on recent labor force dynamics in the United States, these phenomena are not limited to the domestic business cycle, nor are they completely unprecedented.

The global nature of the recession in 2009 provides an opportunity for a simple demonstration of the international variation in labor force dynamics. The three panels in Figure 2 use data from the 2009 recession and 2010 recovery to reveal which Organisation for Economic Cooperation and Development (OECD) countries experienced productive recessions, which ones experienced jobless recoveries, and which ones experienced both phenomena.

Figure 2A plots annual labor productivity growth against annual real gross domestic product (GDP) growth during 2009 for the OECD. The vast majority of economies experienced a contraction in both real GDP and labor productivity (lower left quadrant), but the United States was not alone in experiencing a productive recession (upper left quadrant). For example, Ireland and Iceland managed positive productivity growth despite a huge contraction in real GDP.

Likewise, the phenomenon of jobless recoveries is not unique to the United States. In Europe, the focus has long been on the persistence of high unemployment, known as hysteresis. (1) Figure 2B plots growth in employment against real GDP growth for OECD countries during 2010. The graph shows that while positive GDP growth resumed in all countries, jobless recoveries, defined by negative employment growth, occurred in roughly half of the OECD.

Finally, we explore whether positive productivity growth during recessions tends to be followed by poor labor market performance during the subsequent recovery. Figure 2C plots productivity growth during the Great Recession against growth in employment during the subsequent recovery. Of the nine countries that experienced positive productivity growth during the Great Recession, only three experienced positive growth in employment during the first year of the recovery (upper right quadrant), suggesting a potential link between productive recessions and jobless recoveries.

[FIGURE 1 OMITTED]

Given the large variation in experiences across nations we believe there is much to be learned from examining labor force dynamics in an international context. Most previous studies focus on the United States, and consequently rely on relatively limited time variation in the key variables. We therefore compile an international data set to exploit the cross-sectional variation in the cyclical relationships and institutional variables.

Our paper proceeds as follows. In Section II, we review the academic literature, and in Section III, we describe the international data set. Our empirical work in Section IV exploits cross-country variation in the cyclical behavior of productivity to evaluate the explanatory power of a number of the competing explanations that have been offered in the literature. We explore the determinants of jobless recoveries, as well as the potential connection between productive recessions and jobless recoveries in Section V. Section VI concludes.

II. LITERATURE

The historical pattern for labor productivity in the United States includes a decline during recessions and a return to positive productivity growth during expansions. …

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