Business Economics Vol. 49, No. 3 © National Association for Business Economics
The Labor Market in the Aftermath of the Great Recession MARY C. DALY and ELLIOT M. MARKS* The Great Recession took a large toll on the U.S. labor market, reducing jobs and raising unemployment across most sectors and among workers of all skill levels. Although conditions have improved over the last five years, by most metrics the labor market recovery remains incomplete. The slow progress of recovery has raised concerns that some of the damage done by the recession will be permanent, and that a return to prerecession conditions is unlikely. This paper argues that although the recession coincided with, and even accelerated ongoing structural changes in the economy, most of the disruptions were cyclical and will likely be repaired over time. Should things evolve otherwise, the impact on the potential output and future growth of the economy could be profound. Business Economics (2014) 49, 149–155. doi:10.1057/be.2014.23
Keywords: Great Recession, labor markets, long-term unemployment, labor force participation, cyclical vs. structural disruptions
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ive years out from the end of the Great Recession it is safe to say that it was the worst shock to the U.S. labor market since the Great Depression.1 The recovery has been challenging as well, with conditions only gradually improving and key labor market metrics, including employment growth and the unemployment rate, still stubbornly short of prerecession
1 According to the National Bureau of Economic Research (NBER), the recession officially ended in June 2009.
norms. The slow recovery in labor markets has prompted a spirited debate about the scarring imprint of the Great Recession and the permanent damage it might have left behind.2 Arguing that permanent damage was done, researchers cite the fact that after five years of recovery many workers remain unemployed or have left the labor force altogether. This could imply that the skills of these displaced workers are depreciated or misaligned with current job opportunities.3 If true, then the labor market in the aftermath of the Great Recession is different, and the labor market recovery could be close to complete. Other commentators, most notably Federal Reserve Chair Janet Yellen, offer an alternative view, contending that sluggish aggregate demand rather than permanent damage to skills and employability have limited the re-absorption of workers displaced during the recession [Bernanke 2012; Valletta 2013; Yellen 2014]. Under this view, the current state of the labor market is transitory; and a cyclical recovery, including the transition back to employment for the long-term unemployed and marginally attached workers currently out of the labor force, is possible. 2 Slow in this context is a matter of expectations. Relative to the usual postrecession pace, the recovery has been significantly more modest. However, Jordà, Schularick, and Taylor [2013] argue that given the severity of the financial crisis, the pace of the overall economic recovery in the United States has exceeded expectations. Stock [2014] similarly argues that given the depth of the downturn and the unrelated demographic pressures in the economy, the recovery has progressed mostly in line with expectations. 3 A recent example of this view is given in Krueger, Cramer, and Cho [2014].
This article is an updated version of a presentation at the NABE Annual Meeting on September 9, 2013. See Daly [2012a, b, c] for video presentations of this material. *Mary C. Daly is a Senior Vice President and the Associate Director of Economic Research at the Federal Reserve Bank of San Francisco. Her research spans public finance, labor, and welfare economics and she has published widely on topics related to labor market fluctuations, public policy, income inequality, and the economic well-being of less-advantaged groups. She previously served as a visiting scholar with the Congressional Budget Office, as a member of the Social Security Advisory Board’s Technical Panel and the National Academy of Social Insurance Committee on the Privatization of the Social Security Retirement Program. Daly currently serves on the Editorial Board of the journal Industrial Relations and is a visiting fellow at the University of Southern California Schaeffer Center. She joined the Federal Reserve as an economist in 1996 after completing a National Institute on Aging postdoctoral fellowship at Northwestern University. She earned a Ph.D. in Economics from Syracuse University. Elliot M. Marks is an Economic Analyst in the Economic Research Department at the Federal Reserve Bank of San Francisco. In his role, he has managed and developed several projects and processes related to monetary policy. He joined the Bank in 2011 after graduating summa cum laude from the University of California, San Diego with a B.S. in Management Science.
Mary C. Daly and Elliot M. Marks
The debate about the extent of damage in the labor market and whether it can ever return to its prerecession norm is not purely academic. Understanding what is normal in the labor market has become a key issue for monetary policymakers [Federal Reserve Board 2014a, b]. Should the remaining disruptions in the labor market be structural, they would not be easily ameliorated through conventional monetary policy tools. Businesses also are interested, as their plans depend in part on the future size and quality of the labor force. Ultimately, the extent to which the Great Recession permanently reduced opportunities for a large number of working-age Americans affects everyone. If a sizable number of working-age adults are permanently sidelined, the potential output of the U.S. economy will be lower. The remainder of the paper is organized as follows. We begin by reviewing the toll and imprint of the Great Recession, documenting some key facts about the depth and breadth of its impact on the labor market. We then consider whether the ongoing presence of a large number of long-term unemployed signals a structural problem in labor markets or a sluggish cyclical labor market recovery. We read the evidence as consistent with a sluggish recovery rather than a sign of more structural imbalances between skills and jobs. We end with a discussion of labor force participation, in particular whether recent declines reflect cyclical variation or more lasting structural changes. Although most of the decline in participation appears permanent, we conclude that the remaining share will likely reenter the labor force as economic conditions improve. 1. The Great Recession: Toll and Imprint The best way to understand the toll of the Great Recession is to look at total nonfarm payroll employment and the unemployment rate. Figure 1 shows that from peak (January 2008) to trough (February 2010), total nonfarm employment as measured by the Bureau of Labor Statistics (BLS) establishment survey declined by 8.7 million jobs.4 The pronounced employment losses resulted in an equally striking rise in the unemployment rate, as seen in Figure 2. As the figure highlights, the unemployment rate doubled from 5 percent in late 2007 to 10 percent in late 2009. This increase marked the largest spike in the unemployment rate during any two and a half year period since the monthly series was first reported in 1948. 4 The peak and trough of total nonfarm payroll employment lagged behind the official NBER recession dating peak and trough, which were in December 2007 and June 2009, respectively.
150
Figure 1. Total Nonfarm Payroll Employment Seasonally Adjusted
Millions 140
138
136 8.7 million jobs lost
134
132
130
128 2000
2002
2004
2006
2008
2010
2012
2014
Source: Bureau of Labor Statistics.
Figure 2. Unemployment Rate Seasonally Adjusted
Percent 12 10
8
6
4
2
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
0
Source: Bureau of Labor Statistics.
Although the recession was brought on by a bursting housing bubble and ensuing financial crisis, the contraction in the labor market was much more broad-based. This can be seen in Figure 3, which plots changes in nonfarm payroll employment from December 2007 through June 2009 (official NBER recession start and end dates) for seven major NAICS sectors. Not surprisingly, in the wake of the housing crash, employment in the construction and financial activities sectors fell sharply. But employment also declined in manufacturing, wholesale trade and transportation, professional and business services, and leisure and hospitality, as consumers and businesses pulled back spending. Among all major sectors in the economy, only the government sector added jobs. These gains owed to implementation of automatic and emergency fiscal policies meant to offset the downturn in the economy. The recession also was broad-based across workers. Figure 4 plots unemployment rates at the beginning and
THE LABOR MARKET IN THE AFTERMATH OF THE GREAT RECESSION
Figure 3. Nonfarm Payroll Employment by Industry Change from December 2007 to June 2009; Seasonally Adjusted
Millions 1.0
0.5
0.2 0.0
-0.5
-0.5
-0.5 -1.0
-1.5
-1.5 -1.6 -1.8
-2.0
-2.0 Construction Manufacturing
Trade, Transportation & Utilities
Financial Activities
Professional & Business Services
Leisure & Hospitality
Government
-2.5
Source: Bureau of Labor Statistics.
Figure 4. Unemployment by Educational Attainment Seasonally Adjusted
Percent 18
15.6
Dec-07
16
Jun-09
14 12
9.7
10
8.1
7.7
8
4.8
4.7 3.8
6 4
2.1 2
< HS Diploma: 25+ Years
HS Diploma, No College: 25+ Years
< Bachelor's Degree: 25+ Years
College Graduates: 25+ Years
0
Source: Bureau of Labor Statistics.
end of the recession for workers with different levels of education. Between December 2007 and June 2009, unemployment rates across all education levels more than doubled. The unemployment rate for the least educated rose to the highest level (15.6 percent), but college graduates experienced the largest percent increase in unemployment. Even newly minted college graduates were not immune to the effects of the recession. Several studies have found that unemployment rates and part-time employment rates for new
college graduates also rose rapidly [Kahn 2010; Pianalto 2010; Hobijn, Gardiner, and Wiles 2011]. In addition to being large and broad-based, the shock to the labor market had other important qualities that magnified its impact. For one, a majority of job losses during the recession were permanent rather than temporary. This contrasts with previous recessions, in which a majority of the job losses were accounted for by temporary layoffs. Second, the large disruptions to finance- and housing-related industries 151
Mary C. Daly and Elliot M. Marks
Figure 5. The Long-Term Unemployed As a percent of total unemployed
Figure 6. Labor Force Participation Rate Percent 50
Seasonally Adjusted
Percent 68
45
67
40
66
35
65
30
64
25
63
20
62
15
61
10
60 59
5 0 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Bureau of Labor Statistics.
meant that large numbers of workers would need to look in other industries to regain employment. Finally, the duration of the downturn, in particular the length of time over which layoffs rose, meant that the ranks of the unemployed were continually rising and newly unemployed workers had limited opportunities to find new jobs. These factors combined to boost the fraction of job losers who would eventually end up in a state of long-term unemployment, as seen in Figure 5. By the end of the recession, the share of the total unemployed who were unemployed for 27 weeks or more had reached 45 percent, the highest point recorded in the data. These factors also contributed to a precipitous decline in labor force participation, as seen in Figure 6. Some of the decline in participation reflects anticipated demographic changes associated with the aging of the baby boomers. However, the exodus of workers from the labor force has been far larger than was projected prior to the recession, suggesting the economy also played a role. At the five-year mark, there is considerable evidence that the labor market has improved and that the recovery is gaining momentum.5 Total nonfarm employment growth has averaged over 200,000 jobs per month over the past 12 months, the unemployment rate is steadily declining, and wage growth is showing signs of picking up. That said, the unemployment rate remains elevated relative to its prerecession level and labor force participation continues to decline. These are two of the lasting imprints of the Great Recession. In the next sections, we examine 5
See Daly and Hobijn [2013] for an examination of the amount of momentum in the labor market.
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58 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Bureau of Labor Statistics.
whether these imprints will diminish as the economy recovers or if they will persist as more permanent features of the economy. 2. The Permanence of Long-Term Unemployment Five years into recovery, the unemployment rate remains elevated relative to its prerecession level. This owes in large part to the still high share of long-term unemployed (Figure 5). These facts have raised concerns that the long-term unemployed are structurally removed from the labor market. In this case, the unemployment rate may be understating the strength of the recovery and overstating the amount of slack still present in the labor market.6 Supporting this possibility is the observation that unemployment rates for the short-term unemployed have declined more quickly in the recovery than have those for the long-term unemployed. This can be seen in Figure 7, which plots the total unemployment rate, as well as the unemployment rates for the short-term (26 weeks or less) and the long-term (27 weeks or more) unemployed.7 Both the short- and long-term unemployment rates rose considerably during the recession. However, relative to previous post-War II recessions, the run-up in long-term unemployment was far more striking. The long-term unemployment rate peaked at twice the value achieved at any other time in the post-War period. In contrast, the short-term unemployment rate 6
Alternatively, some have argued that the unemployment rate is currently understating the amount of slack as it does not include involuntarily part-time workers or marginally attached and discouraged workers. 7 These rates are additive so that the short-term unemployment rate, the dotted line, and the long-term unemployment rate, the dashed line, sum to the total unemployment rate, the solid line.
THE LABOR MARKET IN THE AFTERMATH OF THE GREAT RECESSION
Figure 7. Unemployment Rate by Duration Percent 12 Total unemployment rate Short-term unemployment rate
was mostly complete by mid-2013, it likely has played a limited role in long-term unemployment since that time.
10
Long-term unemployment rate
Skill mismatch 8
6
4
2
0 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Sources: Bureau of Labor Statistics; authors’ calculations.
rose less, in percentage-point terms, during the Great Recession than it did in the 1973–75 recession. Notably, while the short-term unemployment rate has largely returned to its prerecession level, the long-term unemployment rate remains abnormally high. These patterns raise the specter that the long-term unemployed are fundamentally different than the shortterm unemployed and represent a structural, rather than a cyclical problem. There are three main explanations offered in support of the idea that long-term unemployment is structural: ● ● ●
the extension of emergency unemployment insurance skill mismatch skill depreciation or scarring We discuss each of them in turn.
Unemployment insurance In response to the depth and length of the recession, the federal government extended the duration of unemployment insurance from the normal 27 weeks to up to 99 weeks. Unemployed workers were eligible for the additional financial support as long as they continued to search for a job. The extensions potentially increased long-term unemployment by reducing the intensity with which workers searched for jobs and/or by delaying planned exits from the labor market until after the extended benefits expired. A number of studies have examined the impact of emergency unemployment insurance on the duration of unemployment. These studies generally conclude that extended benefits boosted long-term unemployment for a time, but the effects were transitory [Valletta and Kuang 2010a, b; Farber and Valletta 2013]. In particular, as the program
The Great Recession began with a housing crisis that dramatically reduced demand for new home construction and housing-related goods and services. To the extent that displaced workers from housing-related industries lack skills necessary to fill jobs in other, faster-growing sectors of the economy, skill mismatch could contribute to an elevated level of long-term unemployment.8 Although a rise in skill mismatch following such a large economic shock is plausible, researchers have found limited evidence that it had a significant impact on the unemployment rate.9 Moreover, there is little indication that mismatch is likely to be a factor going forward. Measures of mismatch—including dispersion in employment growth across industries, occupations, and states as well as more formal indices of industry and occupational mismatch—spiked during the recession but came down sharply since, returning to prerecession levels.10 Skill depreciation and/or scarring Long periods of unemployment can be costly. Skills can depreciate and employers can take a negative signal from extended joblessness. Although these ideas seem sensible, quantifying their effects has been challenging. Some observers have noted that the long-term unemployed are unimportant in standard models of inflation, implying they are at the margins of the labor market and therefore fundamentally different than the short-term unemployed [Gordon 2013; Krueger, Cramer, and Cho 2014]. On the other hand, comparisons of the characteristics of short- and long-term unemployed find little evidence of observable differences [Krueger, Cramer, and Cho 2014, Table 6; Yellen 2014]. And, although there is some work showing that employers take long-term unemployment as a negative signal, there is no evidence that this reduces the probability of re-employment to zero.11 8
The concept of mismatch was well described in a speech by President Kocherlakota [2010] of the Federal Reserve Bank of Minneapolis. 9 Daly and others [2012] review this literature and conclude that mismatch played only a small role in the overall rise in the unemployment rate or the natural rate of unemployment. 10 Formal indices of mismatch can be found in Sahin and others [2012]; mismatch measured by employment dispersion can be found in Valletta and Kuang [2010b]. 11 Eriksson and Rooth [2014] provide evidence that employers and hiring managers associate a stigma with long periods of unemployment.
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Mary C. Daly and Elliot M. Marks
Figure 8. Job-Finding Rates by Duration of Unemployment
3. Interpreting the Decline in Labor Force Participation Percent 25
Expansion (2005-07)
Downturn (2008-10)
Recovery (2011- Mar 2014)
20
15
10
5
0 6
12
18
24+
Duration (months)
Source: Valletta [2013], smoothed using matched CPS microdata.
One way to examine whether the long-term unemployed have become increasingly unemployable is to look at job-finding rates relative to prerecession levels. Job-finding rates for workers with varying degrees of long-term unemployment, at 6, 12, 18, and 24 months, are shown in Figure 8.12 Throughout the business cycle, longer durations of unemployment correspond with lower job-finding rates. However, even workers who have been unemployed for two or more years (24+ months) continue to find jobs. The last bars in each duration category in Figure 8 are particularly relevant for the prospects of the long-term unemployed going forward. They show that job-finding rates have improved during the recovery, even for the group of very long-term (24+months) unemployed. This evidence is consistent with the idea that the long-term unemployed remain employable and will continue to find jobs as the recovery continues. The lack of definitive evidence of structural damage and the fact that the long-term unemployed continue to find jobs lead us to conclude that the large share of long-term unemployed is a cyclical rather than a structural problem. As such, the pool of longterm unemployed should decline over time as conditions improve and as employers are forced to look beyond the pool of short-term unemployed for qualified candidates.13 12 The data in Figure 8 were provided by Robert Valletta and update previously published work in Valletta [2013]. Also see Elsby and others [2011] for a discussion of exit rates of the longterm unemployed. 13 Nickell [1997] argues that the best cure for long-term unemployment is reducing the pool of the short-term unemployed.
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The large-scale exodus from the labor force associated with the Great Recession surprised most analysts and policymakers. Labor force participation fell sharply in the aftermath of the recession and has continued to decline during the recovery, as shown in Figure 6. As of April 2014, the labor force participation rate stood at its late 1970s value, which predated the full entry of women into the labor market. Some of this decline was anticipated, associated with the movement of an aging population of Baby Boomers into retirement. However, the declines have far surpassed the prerecession projections of the BLS.14 The question is what fraction of those who have exited the labor force can be expected to return. In other words, how much of the decline is structural and how much is cyclical. Numerous studies have documented the decline in labor force participation and used a variety of statistical techniques to trace its causes. By and large, these studies conclude that a substantial fraction, between two-thirds and three-quarters, of those who exited the labor force during the Great Recession will not return. These permanent withdrawers are composed of older workers who accelerated their retirement in light of poor labor market prospects and workers with health impairments who moved onto permanent disability benefits when they were unable to find work [Fujita 2014]. Although much of the imprint on labor force participation will be difficult to reverse, a return of the one-quarter to one-third of individuals who dropped out for other reasons remains possible. Some of these individuals already report that they would like a job if one was available, and others simply say they have become discouraged from searching. For these individuals, a fuller recovery of the labor market should be enough to induce their re-entry.15 For other prerecession workers who are now taking care of family members or furthering their education, reentry will likely depend on the strength of the economy. To induce these workers to re-enter, the economy likely will need to post above-trend growth and make it costly, in terms of job opportunities and wages, for individuals to 14
In 2007, the BLS expected labor force participation to be about 3 percentage points higher than it is today, suggesting that anticipated demographic changes have played on a minor role in the observed decline in participation. 15 Using state-level data, Bengali, Daly, and Valletta [2013] find evidence that labor force participation only rebounds when employment has reached its previous peak, suggesting that potential workers wait until the labor market is repaired before reentering.
THE LABOR MARKET IN THE AFTERMATH OF THE GREAT RECESSION
stay on the sidelines.16 Of course, to the extent that the Great Recession altered individuals’ aspirations and preferences away from labor market work, economic conditions would need to be even stronger. 4. Conclusion It is hard to argue that the labor market will emerge from the Great Recession unscathed. However, at this point, the evidence supports optimism about the ongoing forward progress of a cyclical recovery. The evidence presented here suggests that under such a recovery, the long-term unemployed will continue to find jobs, and some workers who left the labor force will return. The labor market is still far from normal, even if normal is not what it used to be. REFERENCES Aaronson, Stephanie, Bruce Fallick, Andrew Figura, Jonathan F. Pingle and William L. Wascher. 2006. “The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply.” Brookings Papers on Economic Activity, 37(1): 69–154. Bengali, Leila, Mary Daly and Rob Valletta. 2013. Will Labor Force Participation Bounce Back? FRBSF Economic Letter, Federal Reserve Bank of San Francisco. Bernanke, Ben S. 2012. Recent Developments in the Labor Market. Speech at the National Association for Business Economics Annual Meeting. Arlington, Virginia, March 26. Daly, Mary. 2012a. U.S. Labor Markets: Longer-Term Perspective. FRBSF Economics in Person Video Series. ________ , 2012b. The Great Recession: Part One. FRBSF Economics in Person Video Series. ________ , 2012c. The Great Recession: Part Two. FRBSF Economics in Person Video Series. Daly, Mary C. and Bart Hobijn. 2013. Downward Nominal Wage Rigidities Bend the Phillips Curve. Federal Reserve Bank of San Francisco. Working Paper 2013–08, Federal Reserve Bank of San Francisco. Daly, Mary C., Bart Hobijn, Ayşcegül Şahin and Robert G. Valletta. 2012. “A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?” The Journal of Economic Perspectives, 26(3): 3–26. Elsby, Michael W.L., Bart Hobijn, Ayşegül Şahin and Robert G. Valletta. 2011. “The Labor Market in the Great Recession—An Update to September 2011.” Brookings Papers on Economic Activity, 2011: 353–384. Erceg, Christopher J. and Andrew Levin. 2013. Labor Force Participation and Monetary Policy in the Wake of the Great Recession. IMF Working Papers 13/245, International Monetary Fund. Eriksson, Stefan and Dan-Olof Rooth. 2014. “Do Employers Use Unemployment as a Sorting Criterion When Hiring? 16
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