BPEA | Spring 2010

The Labor Market in the Great Recession

Michael W. L. Elsby,
Michael W. L. Elsby University of Edinburgh
Ayşegül Şahin, and
Aysegul Sahin Headshot
Ayşegül Şahin Richard J. Gonzalez Regents Chair in Economics - University of Texas at Austin
Bart Hobijn
Bart Hobijn Federal Reserve Bank of San Francisco
Lawrence F. Katz and Robert Shimer

Spring 2010

From the perspective of a wide range of labor market outcomes,
the recession that began in 2007 represents the deepest downturn in
the postwar era. Early on, the nature of labor market adjustment displayed a
notable resemblance to that observed in past severe downturns. During the latter
half of 2009, however, the path of adjustment exhibited important departures
from that seen during and after prior deep recessions. Recent data point
to two warning signs going forward. First, the record rise in long-term unemployment
may yield a persistent residue of long-term unemployed workers
with weak search effectiveness. Second, conventional estimates suggest that
the extension of Emergency Unemployment Compensation may have led to a
modest increase in unemployment. Despite these forces, we conclude that the
problems facing the U.S. labor market are unlikely to be as severe as the European
unemployment problem of the 1980s.