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

Ayşegül Şahin,

Ayşegül Şahin Richard J. Gonzalez Regents Chair in Economics - University of Texas at Austin

Bart Hobijn,

Bart Hobijn Senior Economist and Economic Advisor - Federal Reserve Bank of Chicago

Michael W. L. Elsby, and

MWLE

Michael W. L. Elsby University of Edinburgh

Robert G. Valletta

RGV

Robert G. Valletta

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.