Recession’s Hangover Blurs the Way to a Broad Recovery

Recession’s Hangover Blurs the Way to a Broad Recovery


Recent evidence suggests that the recession’s impact is still echoing through the work force. In a newly published working paper, Danny Yagan, an economist at the University of California, Berkeley, used anonymous tax records to trace more than a million individual workers through the recession and its aftermath. He found that in the places that had been hit the hardest, the effects have lingered — thousands of workers who lost their jobs struggled to find work and ultimately stopped looking. Many, according to Mr. Yagan’s data, still haven’t found it.

“The signals say the recession is over, but employment’s not back to normal,” Mr. Yagan said. “Recession effects aren’t supposed to last this long.”

Indeed, traditional economic theory has held that the damage from recessions is usually short-lived. For most of the 20th century, the nation bounced back quickly from downturns, with displaced workers quickly finding new jobs. Some economists even hailed recessions for their “cleansing” effects, purging unproductive companies in much the same way that forest fires burn up dead wood and release seeds that provide new growth.

More recently, however, that pattern seems to have changed. The United States recovered slowly from the relatively mild recession that followed the bursting of the dot-com bubble, and the current recovery has been anemic by many measures. Economic growth has averaged just 2.2 percent per year since the recession ended, half the rate that followed the recession of the early 1980s. Some places have done even worse: A recent report from the Economic Innovation Group identified large parts of the country, including cities like Cleveland and Memphis, that have experienced essentially no recovery at all.

Photo

Elyria, outside Cleveland, was once home to many factories and a bustling downtown, but few plants remain.

Credit
Andrew Spear for The New York Times

“We seem to have had a series of shocks and recessions where things haven’t quite come back,” said Lawrence F. Katz, a Harvard economist.

For Mr. Yagan and many liberal economists, the solution to the problem is more and faster economic growth: If a weak economy is the disease, then a strong economy is the cure. That would argue for continued stimulus efforts such as low interest rates or perhaps increased spending on infrastructure. They point to the late 1990s as a period when low unemployment and strong demand for workers raised wages and attracted more people to the labor market.

But others are skeptical that a recovery, however strong, could draw back workers who have drifted so far from the labor market.

Another Harvard economist, the former Treasury Secretary Lawrence H. Summers, said Mr. Yagan’s research and other evidence made it “difficult to escape the conclusion” that recessions now do permanent — or at least “quasi-permanent” — damage to the economy. That is, the recession may have been what pushed people out of the labor force, but recovery alone may not be enough to bring them back.

“There are a bunch of people who were knocked out by the recession who aren’t coming back even in the places where unemployment has fallen,” Mr. Summers said, although he said he believed there is room for further improvement in the labor market.

It is not clear what has been preventing workers from returning to work as the economy has improved. Recent research from the Princeton economist Alan B. Krueger has linked the decline in employment among men, in particular, to opioid abuse, a problem unlikely to go away simply because more jobs become available. Other research has explored the possible role of the disability insurance system or even video games in keeping displaced workers — particularly men — out of the job market.

Deeper changes in the structure of the American economy could also be playing a part. A variety of evidence, including declining rates of entrepreneurship and falling job turnover, suggest the nation’s economy has become less dynamic and flexible since 2000, which could have made it harder for workers and companies alike to adapt following the shock of a recession.

And the recession may have accelerated trends that were already underway: Research from Lisa B. Kahn, a Yale economist, and a co-author has found that companies had, in effect, taken advantage of the recession to replace workers with machines. That was particularly damaging for men without a college degree — a group that was already struggling before the recession and that has been especially slow to recover from it.

“We were on a kind of trend where that group of people was going to find it harder and harder to find productive outlets in the labor market, and the recession kind of accelerated that,” Ms. Kahn said. Had the change happened more gradually, Ms. Kahn added, workers might have had a chance to adapt and learn new skills; instead, the recession left millions of them jobless in an environment where there was little demand for their labor.

Work like that of Ms. Kahn and Mr. Krueger suggests that what begins as a cyclical recession-driven problem can harden into a permanent structural issue. That could carry a lesson for policy makers: If the United States no longer recovers as quickly from recessions as it once did, and if those slow recoveries can leave permanent scars on workers, then it is all the more important to kick-start the economy before too much damage is done.

Ben S. Bernanke, then the chairman of the Federal Reserve, warned during the recession and the recovery that workers who stayed unemployed too long might drift too far away from the labor market to return. Mr. Yagan’s research suggests that efforts by the Fed, Congress and the Obama administration to prevent that had not gone far enough.

Jared Bernstein, a former economic adviser to Vice President Joseph R. Biden Jr. who is now with the liberal Center on Budget and Policy Priorities, said Mr. Yagan’s research could be read as an indictment of economic policy after the recession. If Congress and the administration had been willing to act more aggressively, they might have avoided some of the long-lasting damage that has been done.

Change in Employment Rates Since the Start of the Recession

Employment rates for college graduates are nearly back to prerecession levels. But less educated workers still have a long way to go.


Now, it may be too late for some workers — but perhaps not for all. The employment rate among working-age men, including among men without a college degree, has been inching back up. Mr. Yagan said that data, along with other evidence such as continued low inflation, is “consistent with these folks being employable rather than being lost forever.”

Mr. Bernstein agreed, and said that should encourage the Fed and other policy makers to do all they can to keep the recovery on track.

“I see no reason not to try to claw back whatever we can from these effects,” Mr. Bernstein said. “What good reason is there for not trying to draw in any potential labor supply that might be out there?”



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