Employment is a lagging indicator in economic downturns, which means you don't often see a recovery in the jobs market until months after other factors -- like consumer confidence and the stock market -- have long recovered from their recession lows. But in the last two recessions, employment has lagged for a much longer time, by historical standards. What accounts for this, and can we expect a similar "jobless recovery" in 2010?


First, here's a colorful look at past recessions. You can see pretty clearly that the job losses beginning in 74, 80 and 81 all recovered relatively quickly from their bottoms. This is what economists sometimes call a V-shaped recovery, because the bounce from the bottom is steep enough to create the semblance of a single bottom point. But in the last two recessions, you can see that there is no single, pointy bottom to the recession -- instead, there's a lingering U-shaped trough that drags on for months, even after the recession is, by many other accounts, over.

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Why does this happen? The Economist's Free Exchange blog has some theories:

One is that wages can't fall low enough to clear markets. Supply may have so swamped demand for low-skilled workers that a wage rate near zero would have to prevail to encourage hiring, and of course, a wage rate near zero is not legal.

Another is that the prevailing wage rate is below the prevailing reservation wage for most workers. Unemployment benefits aren't particularly generous, but available work may be very unpleasant, and declines in housing and energy costs have increased the purchasing power of whatever savings or income the unemployed do have.

Another possibility is that there are available wage rates that would suit both employer and employee, but other factors are preventing a match. Geographic mismatch could be an issue, for instance--the jobs could be in one place and the people in another, with no means available to move.

And another option might be the effect of structural change in the economy. If workers are highly uncertain about where new jobs will appear, they may delay training or relocation until they have a better idea where job opportunities will be.

These are all interesting, but I'd also like to re-introduce another theory that we can call the Mandel Theory of Growth, based on some recent Michael Mandel pieces in BusinessWeek. Mandel has theorized that America has experienced a lost decade in private sector growth, largely due to the failed promise of US innovation to create jobs in the private sector that aren't dependent on government assistance in the health care and education sectors. Mandel explains that the last 10 years have produced a net of less than 1 million jobs, the worst decade in jobs ever measured in the last half century. This is what our job growth looks like if you account for the health care/education sector:

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I think this speaks the last reason offered by the Economist folks -- that the country isn't responding to structural changes in the economy and as a result, the engine of growth over the last ten years has been in those industries most closely aligned with the public sector. To be sure, this could be the result of overcrowding, as health care spending continues to eat up a larger percentage of our GDP each year. But it's also cause to ask: How do we remake an education system (or retraining system?) that prepares future generations for that structural change so that every recession doesn't lead to a U-shaped job recovery?

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