Working Paper: CEPR ID: DP15954
Authors: Robert E. Hall; Marianna Kudlyak
Abstract: A remarkable fact about the historical US business cycle is that, after unemployment reached its peak in a recession, and a recovery begins, the annual reduction in the unemployment rate is stable at around one tenth of the current level of unemployment. We document this fact in a companion paper, Hall and Kudlyak (2020a). Here, we consider explanations for the surprising consistency of recoveries. We show that the evolution of the labor market from recession to recovery involves more than the direct effect of persistent unemployment of job-losers from the recession shock---unemployment during the recovery is above normal for people who did not lose jobs during the recession. We explore models of the labor market's self-recovery that imply gradual working off of unemployment following a recession shock. We emphasize the feedback from high unemployment to the forces driving job creation. These models also explain why the recovery of market-wide unemployment is so much slower than the rate at which individual unemployed workers find new jobs. The reasons include the fact that the path that individual job-losers follow back to stable employment often includes several brief interim jobs.
Keywords: business cycle; recovery; unemployment; recession
JEL Codes: E32; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high unemployment (J64) | job finding rate (J68) |
| job finding rate (J68) | prolonged recovery (I12) |
| high unemployment (J64) | job creation forces (J23) |
| job loss (J63) | subsequent unemployment (J65) |
| elevated unemployment rates (J64) | contagion effect (E44) |
| high unemployment (J64) | negative feedback loops (C62) |
| negative feedback loops (C62) | slow job creation (J23) |
| high unemployment (J64) | scarring effects (E71) |
| scarring effects (E71) | complicated recovery process (I12) |
| elevated separation rates (J12) | gradual recovery (O56) |