The "Jobless Recovery" From the 2001 Recession: A Comparison to Earlier Recoveries and Possible Explanations

Publication Date: August 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The Business Cycle Dating Committee determined that the tenth recession in the post-World War II era ended in November 2001 based upon its assessment that most of the relevant economic variables had since shown sustained improvement. Labor market data are the aberration. From November 2001 to July 2003, private nonfarm sector employment has declined by 1.2 million. The labor market was also slow to rebound after the recession of the early 1990s, and the term "jobless recovery" was coined. Since this has occurred twice in a row and is perceived to contrast with the historic pattern following other recessions, there is concern that the two recoveries might indicate a trend rather than an anomaly.

The labor market is indeed rebounding more slowly than usual coming out of the 2001 recession. For example, during just two of the previous nine recoveries, the unemployment rate worsened for more than a year (14 and 16 months). At 20 months through July 2003, the rise in the unemployment rate has persisted for unusually long. The weakness of employment is even more unusual. Employment has declined by 1% since the recession ended, and is still declining 20 months into the recovery. The second largest decline in the post-war period was a 0.6% decline that lasted 11 months into the recovery from the 1990-1991 recession. Typically, employment rebounds within 3 months after a recession has ended.

The most compelling explanation for the jobless recovery is the weakness of aggregate spending during the recovery. Growth at this stage of the recovery typically exceeds 5%; in this recovery it has averaged 2.6%, below the sustainable growth rate. The nation has undergone a number of shocks since 2001 that could have depressed spending, including oil shocks, the stock market crash, the corporate scandals, September 11, and the Iraqi War. Some claim that strong productivity growth is reducing employment; but productivity growth would not depress demand as long as the recipients of the income generated by productivity growth, a firm's workers or investors, quickly spend it on consumption or capital investment.

It is also possible that the rise in the unemployment rate is caused by a rise in the nation's long-run "natural rate" of unemployment, determined by the nation's labor market characteristics and policies. The natural rate of unemployment is unemployment that is unrelated to temporary changes in the business cycle. It is unusual for the natural rate to significantly change in a couple of years. If the natural rate is playing a role today, it is more likely because unemployment was further below the natural rate than previously suspected in the late 1990s, and is now returning to the natural rate.

Looking to the future, there are two possibilities. Either the recovery will strengthen and employment will rebound, or the current weakness in the labor market will lead to a "double dip" recession. Forecasters are predicting that the former scenario will prevail, but slowly. This report will be updated as events warrant.