Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?
It is a remarkable fact about the historical US business cycle that, after unemployment reached its peak in a recession, and a recovery began, the annual reduction in the unemployment rate was stable at around 0.55 percentage points per year. The economy seems to have had an irresistible force toward restoring full employment. There was high variation in monetary and fiscal policy, and in productivity and labor-force growth, but little variation in the rate of decline of unemployment. We explore models of the labor market's self-recovery that imply gradual working off of unemployment following a recession shock. These models 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, sometimes separated by time out of the labor force. We show that the evolution of the labor market involves more than the direct effect of persistent unemployment of job-losers from the recession shock---unemployment during the recovery is elevated for people who did not lose jobs during the recession.
Hall’s research was supported by the Hoover Institution. Any opinions expressed are those of the authors and do not reflect those of the Federal Reserve Bank of San Francisco, the Federal Reserve System, or the National Bureau of Economic Research. Nothing in this paper should be construed as a recommendation for the NBER’s dating turning points in the US economy or the function of the Congressional Budget Office in measuring potential GDP.
Robert E. Hall
Hall attends conferences and meetings at the Federal Reserve Board and regional Federal Reserve Banks, at the European Central Bank, and at the central banks of other countries, including the United Kingdom, Portugal, Chile, and Canada. In some cases, he receives honorariums for his participation. His wife, Susan Woodward, has similar relations with the Federal Reserve System. His daughter is an economist at the US Treasury. His son is chief economist of Uber Technologies, Inc. Hall's research is supported by Stanford's Hoover Institution.