two aspects of the recent labor market downturn that have received considerable attention and that have the potential to alter the relation between economic slack and the unemployment rate. the first is the possibility that the extended weakness in the labor market reflects permanent shifts in the composition of jobs - which is often referred to as industrial restructuring. the second development i will address is the decline in labor force participation in recent years. 1 i should note, my comments today reflect only my views and should not be taken to represent the views of my colleagues on the board of governors or in the federal reserve system. industrial restructuring i will begin by providing some background on the current labor market recovery. as shown in chart 1, which plots the level of private payroll employment relative to its level at the end of recessions, as dated by the nber, and compares employment performances across recoveries, the current recovery in employment has been unusually slow - well below the average and even slower than during the “ jobless recovery ” of the early 1990s. this relatively poor employment performance has been due primarily to weak job creation. though the rate of job destruction ( chart 2, upper panel ) rose at the beginning of the recession, it soon dropped below that seen immediately before the recession. in contrast, the pace of job creation ( lower panel ) continued to fall until the end of 2003, when my presentation today is based on work with andrew figura, bruce fallick, and william wascher. employment finally began to turn up. finally, as chart 3 shows, the rise in the layoff rate since the end of 2000 has been due primarily to an increase in permanent layoffs. to many observers, the coincidence of a large share of permanent job losses and sluggish job creation indicates a pronounced shift in the optimal allocation of workers across firms or industries that is, an elevated pace of economic restructuring. the basic story is as follows : permanent reductions in employment in declining industries require workers to search for new jobs, a process made difficult and more time consuming by the likelihood that the skills these workers acquired on their previous jobs may be ill - suited to sectors of the economy in which labor demand is rising. although some workers may accept whatever job is available - whether or not it meets their longer - run expectations for wages, benefits, or stability - our unemployment insurance system provides enough protection that many will search longer for a good match and thus remain out of work longer. moreover, creating new jobs in expanding industries requires businesses to invest, and the most

analysis of this issue and come to a similar conclusion. 4 to investigate further the relationship between restructuring and labor productivity, we compared the performance of industry employment to the performance of industry productivity for the period from 2000 to 2002 ( chart 5 ). the fact that some industries experienced large declines in employment share and well - above - average gains in productivity suggests that adverse demand shocks may not be the only source of restructuring. indeed, these industries include computer systems design, information and data - processing services, and publishing ( which includes software ) - all high - tech categories that have been associated either with positive technology shocks or with the outsourcing of low - productivity jobs. the criteria we use to identify restructuring industries are not designed to capture long - standing restructuring associated with foreign competition, such as in the textile industry. also, both anecdotal evidence and the bailey and lawrence study suggest that foreign competition in the past couple of years has been an important factor for some industries. overall, the evidence points to several tentative conclusions. first, although a period of permanent employment declines is admittedly difficult to distinguish from an extended period of cyclical weakness, the data, on balance, seem to indicate that restructuring has been an important characteristic of the post - 2000 labor market downturn. second, except for a few high - tech industries, restructuring appears to have been caused primarily by adverse shifts in the demand for the output of restructuring industries rather than by positive supply shocks. finally, any slowing of the current labor market recovery from restructuring, if indeed restructuring has played such a part, has likely been due to a slow transition of workers from restructuring industries to expanding industries rather than a slow pace of restructuring in declining industries. the last conclusion is based on the absence of a positive relation between employment share changes and industry productivity growth and on the high rates of job destruction in underperforming industries, both of which suggest that restructuring industries responded aggressively to adverse demand shocks. labor force participation as i noted at the outset, a second anomaly that may have influenced the recent relationship between the unemployment rate and economic slack is the behavior of the labor force participation rate. although the participation rate - adjusted for trend movements - tends to decrease when job prospects are poor, recent declines have well exceeded the cyclical norm. in addition, though the unemployment rate has fallen since the middle of 2003, the participation rate currently remains near the low point reached in the first half of 2004. together, these facts raise the question of whether economic slack is being