It’s not just Obamanomics. The US is stuck in its third-straight “jobless recovery,” just like after the 1990 and 2001 recessions. And new research suggests this “persistence of unemployment” could mean future US recessions and recoveries will continue to resemble Europe’s 1980s downturn. Even after growth recovered, hiring didn’t. That’s when “Eurosclerosis” was coined.
Now get ready for Amerisclerosis. US labor markets used to rebound much faster. After the 1981-82 downturn, the jobless rate was back to normal in 18 months. More than four years after the Great Recession’s official end, however, the unemployment rate is only halfway back to where it was in 2007. And even this slow rate of recovery overstates the job market’s true health given the accompanying decline in the labor force participation rate.
But don’t look for any easy answers in Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence, Olivier Coibion, Yuriy Gorodnichenko, Dmitri Koustas. The researchers are better at crossing off possible reasons than establishing hard causality. Among the failed candidates or candidates that provide only partial explanation: the financial crisis, too little stimulus, less geographic mobility for workers.
Now the team did find that a decline in social trust has raised unemployment because it a) makes workers more likely to claim government benefits like disability pay even if they don’t deserve them, b) has weakened social networks making it tougher to find a job. From the paper: “We find that the decline in trust in the U.S. can account for all of the rise in unemployment persistence observed since the 1980s.” A similar phenomenon was seen also in Europe. But this affect is “dwarfed” by the aging of the US population because once older workers lose their jobs they are more likely to permanently leave the labor force by retiring.
Which leaves us where, exactly? Coibion, Gorodnichenko, and Koustas.
Our interpretation of these results is that there must be additional, and more powerful, factors at work. Identifying these other forces should be a key priority for the research agenda of macroeconomists. There is no shortage of places to look. … . An incomplete list includes rising economic inequality, a declining share of labor income, changes in the demand for skills, and a higher frequency of financial crises.
Let me repeat: which leaves us where, exactly? Well, while new research is being conducted, the researchers suggest government respond to recessions with a more aggressive and sustained fiscal and monetary effort given findings of “a nontrivial contribution of monetary and fiscal policies toward the higher unemployment persistence of recent recessions.” As the authors told The Washington Post’s Jim Tankersley in an email: “Future administrations should, when facing recessions, have concrete plans to deal with the fact that downturns are likely to be more protracted in the foreseeable future.”
In other words, “timely, targeted, and temporary” fiscal stimulus is out. So a future US president and Congress facing recession might want to consider a) spending on needed infrastructure, b) supply-side tax cuts such as a large investment tax credit, c) special efforts to deal with lingering long-term unemployment like job sharing and wage subsidies, d) providing any needed political cover for the Federal Reserve to meet the demand shock through monetary policy, conventional or otherwise.