How Much Do We Understand about the Modern Recession?

MODERN RECESSIONS HIT THE U.S. economy in 1990-91 and in 2001. A modern recession is one occurring in an economy with well-executed monetary policy and a small fraction of the labor force on the factory floor. I review the facts about modern recessions and compare them with earlier recessions, with primary emphasis on the labor market. The facts are perplexing: employment falls in modern recessions at least as far as in past recessions, without identifiable driving forces. Economists' understanding of the modern causeless recession is at an early stage, but progress has occurred and the future of this area of research seems promising. Facts about Modern and Earlier Recessions The first important fact about modern recessions is that they are about as severe when measured in employment losses as earlier ones, leaving aside the Great Depression. Figure 1 shows deviations of total employment from its trend since 1948, and table 1 shows the percentage decline in employment associated with each of the ten recessions of the past sixty years. (The identification of recessions follows the standard chronology as determined by the National Bureau of Economic Research Business Cycle Dating Committee, but the dates are for the peaks and troughs in detrended employment, not the National Bureau's dates for peaks and troughs in economic activity.) The two modern recessions rank second and sixth in employment decline. Plainly the "Great Moderation"--the broad reduction in economic volatility of the last couple of decades--is a feature not of employment, but rather of output. One of the important features of the modern recession is that productivity does not decline as it did in earlier ones. [FIGURE 1 OMITTED] [FIGURE 2 OMITTED] The Great Moderation definitely applies to GDP, whose volatility has fallen by half in the past two decades compared with the two preceding decades. By some measures, such as the standard deviation of year-to-year changes in employment, the volatility of employment also has declined, but not as much. But the key fact is that modern recessions have involved lengthy periods of below-trend employment growth, and so a metric that captures these lengthy periods, such as that in table 1, reveals that employment volatility has not declined at all. Of course, this statement is based on a sample size of two. The next recession could easily have a small and brief decline in employment. The second important fact is that the decline in employment and rise in unemployment associated with a modern recession occur without any important increase in job loss. Figure 2 shows the layoff rate reported by employers in the Job Openings and Labor Turnover Survey (JOLTS), which began in December 2000, just in time to catch the 2001 recession. Apart from a spike at 9/11, layoffs remained quite constant until they began to decline moderately in late 2005. This picture of the 2001 recession is confirmed by a long time series constructed by Robert Shimer for the exit rate from employment, that is, the rate of departure from employment into unemployment or out of the labor force (figure 3). Shimer's series actually declines fairly steadily over the entire period since the early 1980s, with no visible reversal during the 2001 recession. This illustrates the third important fact: unemployment rises in a modern recession because new jobs are hard to find, not because workers have lost jobs. In a recession, the flow of workers out of jobs remains about the same, and so does the flow of workers back into jobs. But a much larger pool of unemployed develops because jobs are hard to find. The rate at which the unemployed find jobs falls in the same proportion that the stock of unemployed rises, resulting in a constant flow from unemployment into new jobs. [FIGURE 3 OMITTED] Figure 3 shows that earlier recessions did generate spikes of job loss. In those recessions, unemployment rose both because workers lost jobs more frequently and because the unemployed found it harder to land new jobs. …