“Jobless Recoveries” Likely in U.S. Future, Much Like in Europe
Current recovery a continuation of previous jobless trends, but underlying source remains unknown
A Fall 2013 BPEA paper by authors Olivier Coibion, Yuriy Gorodnichenko and Dmitri Koustas
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In each of the three most recent U.S. recessions, the unemployment rate has stayed high for longer and longer durations, increasingly resembling the experience of many West European countries in the 1980s, according to a new paper presented today at the Fall 2013 Conference on the Brookings Papers on Economic Activity (BPEA). But the similarities do not end there, the paper finds: four other striking characteristics of the European experience have become increasingly pronounced in the U.S. over the course of the last three recessions: rising shares of long-term unemployment; an increasing incidence of disability claims during economic downturns; diminished disinflationary pressures; and low rates of convergence in regional labor markets.
Taken altogether, the data points to American job recoveries which increasingly resemble the “Eurosclerosis” of the 1980s. In “Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence,” authors Olivier Coibion of the University of Texas at Austin and Yuriy Gorodnichenko and Dmitri Koustas of the University of California at Berkeley rule out the “usual suspects” or generally accepted reasons for why the rise in unemployment in the most recent recession has been so prolonged: it was not the financial nature of the shock nor the inability of wages to fall. Neither was it the oft-cited decline in interstate mobility, nor the aging of the population. Contrary to the conventional wisdom, the authors find these two factors, if anything, acted to decrease unemployment persistence.
Instead, they point to two factors as having contributed toward rising unemployment persistence: rapid turns toward contractionary policies after the ends of the recessions as well as a changing American culture toward work, government and society. But neither force can fully account for the rise in U.S. unemployment persistence over time, and both should have been more than offset by the other factors such as mobility and demographics.
These results point to additional, and more powerful, factors underlying why unemployment has remained unusually high following recent shocks than those that many commentators, and economists, have been focusing on. Discovering the underlying causes of the rising duration in unemployment should be a central task for economists and is important to inform policymaking going forward, they point out. For instance, improved monetary and fiscal policy responses could prevent future sclerotic labor market outcomes after recessions, as well as reducing the speed at which initially expansionary fiscal policies are reversed, as was the case in the 2001 and 2007 recessions, the authors believe.
“If future U.S. downturns are to be more long-lived than pre-1990 recessions, then the nature of fiscal policy responses should likely be revisited. In the pre-1990 environment in which recessions were short-lived events, there was little need to implement discretionary countercyclical fiscal policies, other than perhaps highly transitory ones such as the rebate checks of 2001, because the long-decision lags involved in the legislative process meant that any positive effects of stimulus would likely occur too late. But if business cycles have become systematically more protracted affairs, as seems to be the case, then discretionary fiscal policy responses should target longer-lived projects rather than transitory transfer payments. Investment projects can be especially desirable because these a) tend to have larger stimulative effects per dollar , b) tend to have long-run social returns that significantly exceed those of transfer payments, and c) do not require legislators to vote on multiple ‘stimulus’ packages. If ‘timely, targeted and temporary’ remains the mantra of future stimulus measures, then Amerisclerosis may not be so far away,” they conclude.
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